**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**Form 10-K**

** **

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2002**

 

**Commission File No. 1-12248**

 

**KAISER GROUPHOLDINGS, INC.**

**(successor issuer to Kaiser GroupInternational, Inc.)**

(Exactname of registrant as specified in its charter)

 

**Delaware**

(Stateor other jurisdiction ofincorporation or organization)

 

**54-2014870**

(I.R.S.EmployerIdentification No.)

 

**9302 Lee Highway, Fairfax, Virginia**

(Addressof principal executive offices)

 

**22031-1207**

(ZipCode)

 

**(703) 934-3600**

(Registrant’stelephone number, including area code)

 

Nameof each exchange on which registered:

**None**

 

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

**Common Stock, par value $0.01 per share**

 

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant isan accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes oNo ý

 

The aggregate market value of the registrant’svoting and non-voting common equity held by non-affiliates of the registrant,based on the closing sales price of the Common Stock on the Over-the-CounterBulletin Board on June 28, 2002, was $7,552,794.50.  For purposes of this computation, all officers, directors, and 5percent beneficial owners of the registrant (as indicated in Item 12) aredeemed to be affiliates.  Suchdetermination should not be deemed an admission that such directors, officers,or 5 percent beneficial owners are, in fact, affiliates of the registrant.

 

**APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:**

 

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12,13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court. Yes ý No o

 

The Plan of Reorganization of Kaiser GroupInternational, Inc. under Chapter 11 of the Bankruptcy Code became effective onDecember 18, 2000.  The Plan provides,among other things, that holders of shares of common stock of Kaiser GroupInternational, Inc. received shares of common stock of Kaiser Group Holdings,Inc. and that holders of specified outstanding debt obligations and otherspecified claimants received cash and shares of preferred stock and commonstock of Kaiser Group Holdings, Inc., all in accordance with the terms setforth in the Plan. The initial distribution of securities occurred as of April17, 2001.

 

As of March 26, 2003, there were 1,594,062 sharesof Common Stock outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the Registrant’s definitive proxystatement to be prepared in connection with the Annual Meeting of Shareholdersto be held May 7, 2003 are incorporated by reference into Part III of thisAnnual Report on Form 10-K.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**   |
|--------------|
|         |   |
| Item 1.      | Business |
| Item 2.      | Properties |
| Item 3.      | Legal Proceedings |
| Item 4.      | Submission of Matters to a Vote of Security  Holders |
| Item 4A.     | Executive Officers of the Company |
|         |   |
| **PART II**  |
|         |   |
| Item 5.      | Market for Registrant’s Common Equity and  Related Stockholder Matters |
| Item 6.      | Selected Consolidated Financial Data |
| Item 7.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| Item 7A.     | Quantitative and Qualitative Information about  Market Risk |
| Item 8.      | Financial Statements and Supplementary Data |
| Item 9.      | Changes in and Disagreements with Accountants  on Accounting and Financial Disclosures |
|         |   |
| **PART III** |
|         |   |
| Item 10.     | Directors and Executive Officers of the  Registrant |
| Item 11.     | Executive Compensation |
| Item 12.     | Security Ownership of Certain Beneficial  Owners and Management |
| Item 13.     | Certain Relationships and Related Transactions |
| Item 14.     | Controls and Procedures |
|         |   |
| **PART IV**  |
|         |   |
| Item 15.     | Exhibits, Financial Statement Schedules and  Reports on Form 8-K |
|         |   |
|         | Signatures |
|         | Management Certification – Principal  Executive Officer |
|         | Management Certification – Principal Financial  Officer |

 

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**PART I**

 

**Item 1.****       Business**

 

**Corporate History; Overview**

 

Kaiser Group Holdings, Inc. is a Delaware holdingcompany formed on December 6, 2000 for the purpose of owning all of theoutstanding stock of Kaiser Group International, Inc.  Kaiser Group International, Inc. continues to own the stock ofits remaining subsidiaries.  On June 9,2000, Kaiser Group International, Inc. and 38 of its domestic subsidiariesvoluntarily filed for protection under Chapter 11 of the United StatesBankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301).Kaiser Group International, Inc. emerged from bankruptcy with a confirmed Planof Reorganization (the Second Amended Plan of Reorganization (the Plan)) thatwas effective on December 18, 2000.  Inthis document, we frequently use the terms “we” and “Kaiser” to refer to KaiserGroup Holdings, Inc., Kaiser Group International, Inc. and other subsidiarieswe own.

 

Under the Plan Kaiser Group International, Inc.sold some of its businesses and made payments of cash and stock to variousclasses of creditors described in Note 3 to the Consolidated FinancialStatements.  We now have only a limitednumber of activities, assets and liabilities, primarily consisting of thefollowing:

 

•                  We ownKaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd.  Kaiser-Hill is our major source of income.  Kaiser-Hill currently serves as the generalcontractor at the U.S. Department of Energy’s Rocky Flats EnvironmentalTechnology Site, a former Department of Energy nuclear weapons productionfacility near Denver, Colorado. Kaiser-Hill has performed for the Department of Energy at this sitesince 1995 and in January 2000 was awarded a new contract to manage the closureof the site.  The level of successexperienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site,and the cost of achieving such closure, are the primary determinants of ourlong-term financial performance following the completion of the reorganizationprocess.  See “Kaiser-Hill” below foradditional information on Kaiser-Hill.

•                  Wehave a substantial claim, pending resolution, against the owner of a steelmini-mill constructed for Nova Hut, s.a. in the Czech Republic.  The engineering and construction of themini-mill was completed in 2000 by a subsidiary of Kaiser Group International,Inc. called Kaiser Netherlands, B.V.  See“Nova Hut” below for additional information on the Nova Hut project.

•                  UntilSeptember 30, 2002 we held a minority ownership interest in ICF ConsultingGroup, Inc. (a division that Kaiser Group International, Inc. sold in1999).  We continue to hold an 8 1⁄2%subordinated promissory note from ICF Consulting due June 25, 2006 in theprincipal amount of $6.4 million as a result of that transaction.

•                  Wehave a wholly-owned captive insurance company that is no longer issuing newpolicies and is solely involved in resolving remaining claims made againstpreviously issued policies.

•                  Wehave an ongoing obligation to fund a capped post-employment medical benefitplan for a fixed group of retirees.

 

**GeneralTerms and Distribution Status of Plan of Reorganization**

 

The effectiveness of the Plan as of December 18, 2000 did not in and ofitself complete the bankruptcy process. The process of resolving in excess of $500 million of claims initiallyfiled in the bankruptcy is ongoing.  Byfar the largest class of claims (Class 4) was made up of creditor claims otherthan trade creditor and equity claims. Class 4 claims included holders ofKaiser Group International, Inc.’s senior subordinated notes due 2003 (OldSubordinated Notes). Holders of allowed Class 4 claims received a combinationof cash and our preferred (New Preferred) and common stock (New Common) inrespect of their claims. Such holders received one share of New Preferred andone share of New Common for each $100 of claims. However, the number of shares ofNew Preferred issued was reduced by one share for each $55.00 of cash receivedby the holder of an allowed Class 4 claim.

 

Pursuant to the terms of the Plan, we were required to complete ourinitial bankruptcy distribution within 120 days of the effective date of thePlan.  Accordingly, on April 17, 2001,we effected our initial distribution of cash, New Preferred and New Common toholders of Class 4 claims allowed by the Bankruptcy Court.  At that time, there were approximately$136.8 million of allowed Class 4 claims. The amount of unresolved claims remaining at April 17, 2001 wasapproximately $130.5 million.

 

To address the remaining unresolved claims, the Bankruptcy Court issuedan order on March 27, 2001 establishing an Alternative Dispute Resolution (ADR)procedure whereby the remaining claimants and we produce limited supportingdata relative to their respective positions and engage in initial negotiationefforts in an attempt to reach an agreed claim

 

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determination.  If necessary,the parties are thereafter required to participate in a non-binding mediationbefore a mediator pre-selected by the Bankruptcy Court.  All unresolved claims as of March 27, 2001became subject to the ADR process. Since April 17, 2001, the date of theinitial distribution, $94.9 million of asserted claims have been withdrawn,negotiated or mediated to an agreed amount, resulting in cash paymentsapproximating $1.1 million and the issuance of 683 shares of New Preferred and823 shares of New Common. As of March 26, 2003, the amount of unresolved claimswas approximately $43.2 million. We expect that substantial progress willcontinue to be made in the resolution of claims throughout 2003.  Based upon substantial progress made in theADR procedures in the fourth quarter of 2002 and to date in 2003, we currentlybelieve that the total amount of Class 4 claims ultimately to be allowed in thebankruptcy proceeding will not exceed $145.0 million, compared to our originalestimate of $150.0 million.  Asdemonstrated by the claim settlements completed since April 17, 2001 and basedon the belief that it is in the Company’s and the  current shareholders’ best interests, we have been settlingcertain remaining Class 4 claims entirely for cash payments in lieu of thecombination of cash and New Preferred and New Common as contemplated in thePlan.  We intend to continue to use thissettlement alternative during the resolution of remaining Class 4 claims, butwe have no ability to determine the effect of the outcome on our overallfinancial condition in the event such settlements are accepted in the future.

 

With respect to the remaining unresolved claims, the Plan requiredthat, at the date of the initial distribution, we maintain sufficient cashreserves such that if all remaining unresolved claims were ultimately deemedallowed at the originally claimed amount, we would be able to satisfy suchclaims, including the dividends that had accrued on the related New Preferredsince April 17, 2001.  The cash reserverequirement, and the fact that we had not yet received a substantial cashpayment that we asserted we were due from Nova Hut, limited the amount of cashavailable at the time of the initial distribution to the holders of allowed Class4 claims. We determined that an aggregate of $25.0 million, or approximately$0.09347 per $1.00 of allowed and “deemed allowed” Class 4 claims, wasavailable at the time of the initial distribution to allowed Class 4 claimholders.  Thus, more shares of NewPreferred were issued than would have been had the claims resolution processadvanced more quickly and had more cash been available from the Nova Hutproject and/or other sources.  Due tothe proportion of remaining unresolved Class 4 claims in relation to the totalof all resolved and unresolved claims, approximately $12.3 million of the $25.0million in available cash was reserved and classified as Restricted Cash onApril 17, 2001.  Approximately $6.5million remained reserved as Restricted Cash as of December 31, 2002 to addressthis provision for remaining open bankruptcy claims.

 

From time to time in the future, as remaining unresolved claims areresolved, excess cash available from the “reserve” fund (including cash addedto “reserve” fund in payment of pro forma dividends on retained shares of NewPreferred) must be used to redeem outstanding shares of New Preferred.

 

On January 31, 2003, we used cash totaling $15.5million to redeem 282,000 shares of outstanding New Preferred in accordancewith the terms of the Plan, the New Preferred and the KGP put rights aredescribed in Note 9 of the Consolidated Financial Statements.  Our Board of Directors will continue toevaluate on a quarterly basis additional redemptions of New Preferred, but noneare anticipated at this time.

 

**Kaiser-Hill**

 

Our major remaining asset and primary source ofincome is our 50% ownership interest in Kaiser-Hill Company, LLC, which we ownequally with CH2M Hill Companies Ltd. Kaiser-Hill was formed solely for the performance of the current andformer Rocky Flats contracts.  CH2M Hill designates three of the fivemembers of Kaiser-Hill’s Board of Managers and we designate two members.

 

Kaiser-Hill currently serves as the general contractor at the U.S.Department of Energy’s Rocky Flats Environmental Technology Site near Denver,Colorado. Kaiser-Hill has performed since 1995 at this site, a formerDepartment of Energy nuclear weapons production facility.  Kaiser-Hill is working to stabilize andsafely store radioactive materials at the site and other locations, clean upareas contaminated with hazardous and radioactive waste, and restore much ofthe 6,000-acre site to its natural state for future use by the public.  The level of success experienced byKaiser-Hill in achieving timely closure of the Rocky Flats site, and the costof achieving such closure, are the primary determinants of our long-termfinancial performance.

 

Effective February 1, 2000, Kaiser-Hill wasawarded a new contract pursuant to which Kaiser-Hill is providing services thatwill complete the restoration of the Rocky Flats site and close it toDepartment of Energy occupation.  Theeconomic terms of the new contract provide that Kaiser-Hill will earn revenueequal to the actual cost of completing the project in addition to a performancefee based on a combination of the actual cost of completing the site closureproject and the actual date of completing the project.  The performance fee will be based on targetsin the contract for the cost and date of completing the project.  The potential fee to be earned pursuant tothe new contract ranges from $151.0 million to $463.0 million based onKaiser-Hill’s costs to complete the site closure being within the range oftargeted completion cost of $3.6 billion and $4.8 billion, and completion atvarious dates between 2005 - 2007.  Ifthe project were completed for a total cost in excess of the

 

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target cost, then the potential fee would bereduced because Kaiser-Hill will be required to share 30% of all additionalcosts.  Kaiser-Hill is also subject to a$20 million maximum penalty if the December 31, 2007 closure date is notmet.  See Item 7. – “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” forfurther discussion of this activity.

 

**Nova Hut**

 

Following the reorganization process,Kaiser Group International, Inc. retained its Netherlands subsidiary, KaiserNetherlands, B.V.  Kaiser Netherlandshad been responsible for the construction ofa steel mini-mill for Nova Hut in the Czech Republic.  After construction of the steel mini-millwas completed in 2000, the contract with Nova Hut provided for a maximum ofthree possible performance tests.  Thefirst performance test was completed on November 13, 2000.  Kaiser Netherlands believes the firstperformance test was successful and that Nova Hut should have agreed to finalacceptance of the mini-mill and made final payment of amounts accrued by KaiserNetherlands throughout the project. Rather, Nova Hut asserted that the first test was not successful.  To date, this dispute has not been resolved,and Kaiser Netherlands has resorted to legal proceedings to enforce its rights.  The primary legal venue at this time is theDelaware bankruptcy proceedings for Kaiser Group International, Inc., whereKaiser Group International, Inc. has asserted claims against Nova Hut and theInternational Finance Corporation, while rejecting substantial claims involvingcontract breach from Nova Hut and the International Finance Corporation.  The claims filed by Nova Hut and theInternational Finance Corporation in the Delaware bankruptcy court have beenwithdrawn.  Our claims against Nova Hutand the International Finance Corporation remain active.  The cost of the litigation of this dispute,as well as the cost of a possible ongoing presence in Ostrava, Czech Republic,have had, and may continue to have, a negative impact on our cash flow and thecash flow of Kaiser Netherlands.  At the date of this Report there are noassurances that settlement will ultimately be achieved through a bankruptcycourt-sponsored mediation.

 

**Other Retained Assets, Activities andObligations**

 

Until September 30, 2002 we owned a 10% interest in ICF Consulting Group, Inc., aprivately held entity, that was retained by Kaiser Group International, Inc.when it sold its Consulting Group in June 1999.  In September 2002 we consummated a settlement of outstandingdisputes with ICF Consulting.  As aresult of that transaction, we continue to hold an 8 1⁄2% subordinated note fromICF Consulting due June 25, 2006 in the principal amount of $6.4 million, netof a $0.5 million reserve for uncollectibility.

 

We own a captive insurance company that is nolonger engaged in issuing new policies but is solely engaged  in the process of resolving existingclaims.  Restrictions on the insurancecompany’s cash balances, maintained to support statutory insurance reserves,will be released as reserve requirements decrease in the future and to theextent such cash balances are not used in payment of resolved claims.

 

We also have the obligation to pay certainmedical, disability and life insurance benefits to a fixed group of retireesfor life.  Such plans cover certainindividuals who retired prior to 1993. There are approximately 653 retirees and dependents currently covered bythe plans, the average age of whom is approximately 80.  The actuarially determined present value ofthis obligation as of December 31, 2002, based on the existing commitments,interest rate assumptions and related medical benefit insurance policies, was$7.2 million, net of an unrecognized actuarial gain of $0.5 million.  Although we intend to attempt to reduceremaining exposures relative to the costs of this obligation in the future,there can be no guarantee that this will be feasible, nor can we estimate theamount of potential future savings with any reasonable degree of accuracy.

 

Our assets also include those subsidiaries thatwere not debtors in the Kaiser Group International, Inc.’s bankruptcyproceedings.  However, many of thosesubsidiaries are foreign entities and, except for Kaiser Netherlands whichperformed services for the Nova Hut project and those subsidiaries related toKaiser-Hill, subsidiaries that were not debtors in Kaiser Group International,Inc.’s bankruptcy proceedings do not have material value.  It is anticipated that a number of suchsubsidiaries will be dissolved or otherwise cease to exist or become totallyinactive.

 

Our Board of Directors will consider whether we willengage in any additional business activities in the future.  Among other things, it is anticipated thatthe Board of Directors will consider whether we should attempt to takeadvantage of the successful history of Kaiser Group International, Inc. in thegovernment services market, either independently and through Kaiser-Hill oraffiliates, in order to develop a new revenue base.

 

**Insurance**

 

We have a risk management and insurance programin place that provides a range of coverages tailored to the needs of thereorganized company.  Insurancecoverages include policies for fiduciary, crime, directors and officersliability, property, general liability, workers’ comp, and professionalliability “runoff” coverage to deal with liabilities arising from past activities

 

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and projects, if necessary.

 

We believe that the insurance coverages wemaintain, including self-insurance, protect against risks that are comparableto those of similar businesses of our scope and present operating profile andthat related coverage amounts are economically reasonable. At this time, weexpect to continue to be able to obtain insurance in amounts generallyavailable to firms with a similar profile. Insurance costs are rising, and there can be no assurance that theinsurance coverage and levels maintained by us will continue to be reasonablyavailable.  An insured claim, oruninsured claim for that matter, arising out of pre-reorganization orpost-reorganization activities of Kaiser Group International, Inc., ifsuccessful and of sufficient magnitude, could have a material adverse effect onour financial position.

 

**Government Regulation**

 

We may, from time to time, either individually orin conjunction with other government contractors operating in similar types ofbusinesses, be involved in U.S. government investigations for allegedviolations of procurement or other federal laws and regulations.  No charges presently are known to have beenfiled against Kaiser Group International, Inc. or our other subsidiaries bythese agencies.

 

**Employees**

 

As of March 26, 2003, we had approximately 13part-time employees.

 

**Company WebsiteInformation**

 

We currently do not maintain a website.

 

**Item 2.****       Properties**

 

We owned no properties at December 31, 2002, and our only leasedproperty at that date was located at 9302 Lee Highway, Fairfax, Virginia22031-1207.  The majority of all leasedproperties were transferred to others as part of asset sale transactions in1999 and 2000.

 

**Item 3.****       Legal Proceedings**

 

On June 9, 2000, Kaiser Group International, Inc.and 38 of its wholly owned subsidiaries filed petitions for relief underChapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for theDistrict of Delaware in order to facilitate the restructuring of Kaiser GroupInternational Inc.’s long-term debt, trade and other obligations. Kaiser GroupInternational, Inc. continued to operate as a debtor-in-possession subject tothe Bankruptcy Court’s supervision and orders until its Plan of Reorganizationwas confirmed on December 5, 2000 and became effective on December 18, 2000.The provisions of such Plan are further described under Item 1 of this Report,in Note 3 to the Consolidated Financial Statements, and in a Current Report onForm 8-K filed with the Securities and Exchange Commission on December 14, 2000by Kaiser Group International, Inc.

 

In the course of normal business activities, various claims or chargeshave been asserted and litigation commenced against Kaiser Group International,Inc. arising from or related to properties, injuries to persons, and breachesof contract, as well as claims related to acquisitions and dispositions. Suchclaims are now part of the overall bankruptcy proceeding. Claimed amounts maynot bear any reasonable relationship to the merits of the claim or to a finalcourt award. In the opinion of management, an adequate reserve has beenprovided for final judgments, if any, in excess of insurance coverage, thatmight be rendered against Kaiser Group International, Inc. in the event ofunsuccessful bankruptcy resolution. The continued adequacy of reserves isreviewed periodically as progress on such matters ensues.

 

**Item 4.****       Submission of Matters to a Vote ofSecurity Holders**

 

No matter was submitted to a vote to securityholders during the fourth quarter of 2002.

 

**Item 4A.****    Executive Officers of the Company**

 

John T. Grigsby Jr., 63, is President and ChiefExecutive Officer and serves on the Board of Managers of Kaiser-Hill.  Mr. Grigsby is also the President of John Grigsbyand Associates, Inc., a firm which he founded in June 1984 to provideconsulting assistance to financially distressed and reorganizingcompanies.  Mr. Grigsby has served asthe Trustee for the Auto Works Creditors’ Trust and has served as chief

 

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executive officer of a number of financiallydistressed companies, including Super Shops, Inc., Auto Parts Club, ReddiBrake, Rose Auto Stores-Florida, Inc. as well as for a number of Chapter 11debtors, including Pro Set, Inc., Lomas Financial Corporation and ThomsonMcKinnon Securities, Inc.

 

Marijo L. Ahlgrimm, 42, is Executive VicePresident and Chief Financial Officer. Prior to becoming Executive VicePresident and Chief Financial Officer upon the effectiveness of Old Kaiser’sPlan, Ms. Ahlgrimm served as Senior Vice President and Corporate Controller ofthe predecessor Kaiser entities since December, 1997. From 1993 to 1997, Ms.Ahlgrimm was Vice President and Controller of an information technology serviceprovider that was subsequently acquired by TRW in December, 1997. Ms. Ahlgrimmwas a manager with PricewaterhouseCoopers LLP from 1985 to 1993. Ms. Ahlgrimmgraduated from the University of Wisconsin-Madison (B.B.A.).

 

**PART II**

 

**Item 5.****       Market for Registrant’s Common Equity andRelated Stockholder Matters**

 

**Market Information**

 

The common stock of Kaiser Group International, Inc. (Old Common) wastraded on the Over-the-Counter Bulletin Board system under the symbol “KSRG”.The Over-the-Counter Bulletin Board quotations reflect inter-dealer prices,without retail mark-up, mark-down or commission and may not necessarilyrepresent actual transactions. Effective with implementation of Kaiser’s Plan of Reorganization, on orabout April 17, 2001 each 96 shares of Old Common were exchanged for 1 share ofNew Common.  New Common currently tradeson the Over-the-Counter Bulletin Board system under the symbol “KGHI”.  At March26, 2003, there were 138 shareholders of record of the New Common.

 

The following table sets forth the high and lowsale prices for the New Common as reported on the Over-the-Counter BulletinBoard.  Historical prices per share forthe period January 1, 2001 to the initial distribution date of April 17, 2001have been adjusted to show the effect of the 96:1 conversion ratio of OldCommon to New Common effected in the initial distribution.

 

|                    |   | **2002** |   | **2001** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| Year Ended December 31, |   |     |   |     |   |   |   |   |   |
| First Quarter           |   | $        | 3.00   |     | $      | 2.20 |   | $ | 6.24 |   | $ | 1.44 |   |
| Second Quarter          |   | 4.75     |   | 2.80     |   | 4.80 |   | 0.48 |   |
| Third Quarter           |   | 4.25     |   | 3.10     |   | 2.45 |   | 1.70 |   |
| Fourth Quarter          |   | 5.50     |   | 2.00     |   | 3.10 |   | 1.95 |   |
|                         |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

Our Transfer Agent and Registrar is EquiServeTrust Company, N.A, P.O. Box 43069, Providence, RI 02940-3069.  The Shareholder Relations telephone numberis (781) 575-2723, the hearing impaired numbers are (800) 490-1493 and (781) 575-2692 for callers outside of the United States and the internetaddress is http://www.equiserve.com.

 

Kaiser Group International, Inc. never paid cashdividends on its Old Common.  Weanticipate that no cash dividends will be paid on the New Common for theforeseeable future and that our earnings will be retained for use in thebusiness and, consistent with the terms of the New Preferred and the KGP putrights described in Note 3 to the Consolidated Financial Statements, be used topay dividends on and redeem outstanding shares of New Preferred.  Our Board of Directors determines ourdividend policy based on its results of operations, required payment ofdividends on New Preferred, financial condition, capital requirements, andother circumstances.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

The following table sets forth information as ofDecember 31, 2002 with respect to compensation plans under which equitysecurities of the Company are authorized for issuance:

 

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| **Plan Category**                                       |   | **(I)****Number of  securities to be  issued upon exercise  of outstanding  options and  warrants** |   | **(II)****Weighted-  average  exercise price  of outstanding  options and  warrants** |   | **(III)****Number of securities  remaining available  for future issuance  under plans** |   |
|---------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|
|                                                    |   |                                                                                                |   |                                                                                  |   |                                                                                     |   |
| Equity compensation plans approved by  shareholders     |   | —                                                                                              |   | —                                                                                |   | —                                                                                   |   |
| Equity compensation plans not approved by  shareholders |   | —                                                                                              |   | —                                                                                |   | 150,000                                                                                  |   |
| Total                                                   |   | —                                                                                              |   | —                                                                                |   | 150,000                                                                                  |   |

 

**Recent Sales ofUnregistered Securities**

 

On April 17, 2001, we made a distribution of cash, New Preferred andNew Common to holders of Class 4 claims allowed by the Bankruptcy Court.  Holders of Class 4 claims received one shareof New Preferred and one share of New Common for each $100 of claims.  However, the number of shares of NewPreferred issued was reduced by one share for each $55.00 of cash received bythe holder of an allowed Class 4 claim. On April 17, 2001, we issued an aggregate of 1,136,024 shares of NewPreferred and 1,368,632 shares of New Common to the holders of allowed Class 4claims. On March 13, 2002, we issued 683 shares of New Preferred to KE RealtyService, Inc. in connection with the settlement of its Class 4 claim.  These issuances were exempt fromregistration under Section 1145 of the U.S. Bankruptcy Code.

 

On January 15, 2002, we issued shares of New Common to the followingdirectors as part of their compensation for service as officers and Board ofDirectors:  John T. Grigsby, Jr. (2,000shares), James J. Maiwurm (1,000 shares), and John B. Bennett (1,000shares).  These issuances were exemptfor registration under Section 4(2) of the Securities Act of 1933.

 

**Item 6.****       Selected Consolidated Financial Data**

 

Selected consolidated financial data of Kaiser Group Holdings, Inc. forthe years ended December 31, 2002 and 2001 and of Kaiser Group International,Inc. for the years ended December 31, 2000, 1999 and 1998, have been derivedfrom our and/or Kaiser Group International, Inc.’s audited consolidatedfinancial statements. This information should be read in conjunction with theConsolidated Financial Statements and the related notes thereto appearingelsewhere in this Report and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”. Certain reclassifications have been madeto the prior period financial statements to conform to the presentation used inthe December 31, 2002 Consolidated Financial Statements.

 

**Selected Consolidated Financial Data**

**(in thousands, except per share data)**

 
|                                                                                                                                                                     |   | **Successor Company** |   | **Predecessor Company** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|-------------------------|--------|
|                                                                                                                                                                     |   | **2002**              |   | **2001**                |   | **2000** |   | **1999** |   | **1998** |   |
| Statement of Operations Data:                                                                                                                                            |   |                  |   |                    |   |   |   |   |   |   |   |
| Gross revenue                                                                                                                                                            |   | $                     | — |                    | $      | — |   | $ | 271,385 |   | $ | 643,044 |   | $ | 632,600 |   |
| Service revenue                                                                                                                                                          |   | —                |   | —                  |   | 76,018 |   | 186,856 |   | 154,500 |   |
| Operating loss                                                                                                                                                           |   | (7,028                | )      | (10,792                 | )      | (224 | ) | (16,544 | ) | (20,722 | ) |
| Income (loss) from continuing operations before reorganization items,  income taxes, minority interest, extraordinary items and cumulative effect of  accounting change. |   | 29,165                |   | 7,657                   |   | (1,736 | ) | (35,260 | ) | (39,462 | ) |
| Income (loss) before extraordinary items and cumulative effect of  accounting change                                                                                     |   | 18,343                |   | (4,957                  | )      | 29,762 |   | (5,324 | ) | (93,442 | ) |
|                                                                                                                                                                     |   |                  |   |                    |   |   |   |   |   |   |   |
| Basic and Diluted Earnings per share:                                                                                                                                    |   |                  |   |                    |   |   |   |   |   |   |   |
| Continuing operations before extraordinary items and cumulative effect  of accounting change                                                                             |   | $                     | 8.60   |                    | $      | 1.92 |   | $ | 1.74 |   | $ | (1.65 | ) | $ | (1.80 | ) |
| Discontinued operations, net of tax                                                                                                                                      |   | 0.31                  |   | (9.11                   | )      | (0.46 | ) | 1.42 |   | (2.07 | ) |
| Extraordinary items, net of tax                                                                                                                                          |   | —                |   | —                  |   | 5.35 |   | (0.02 | ) | (0.05 | ) |
| Cumulative effect of accounting change, net of tax                                                                                                                       |   | —                |   | —                  |   | — |   | — |   | (0.25 | ) |
|                                                                                                                                                                     |   |                  |   |                    |   |   |   |   |   |   |   |
| Total                                                                                                                                                                    |   | $                     | 8.91   |                    | $      | (7.19 | ) | $ | 6.63 |   | $ | (0.25 | ) | $ | (4.17 | ) |
|                                                                                                                                                                     |   |                  |   |                    |   |   |   |   |   |   |   |
| Weighted average common shares outstanding:                                                                                                                              |   |                  |   |                    |   |   |   |   |   |   |   |
| —basic                                                                                                                                                              |   | 1,590                 |   | 1,119                   |   | 23,255 |   | 23,823 |   | 24,092 |   |
| —diluted                                                                                                                                                            |   | 1,590                 |   | 1,119                   |   | 23,255 |   | 23,823 |   | 24,092 |   |

 

6

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|                                |   | **Successor Company** |   | **Predecessor Company** |   |
|-------------------------------------|--------|-----------------------|--------|-------------------------|--------|
|                                |   | **2002**              |   | **2001**                |   | **2000** |   | **1999** |   | **1998** |   |
| Balance Sheet Data (end of period): |   |                  |   |                    |   |   |   |   |   |   |   |
| Total assets                        |   | $                     | 96,195 |                    | $      | 80,891 |   | $ | 106,168 |   | $ | 253,563 |   | $ | 428,071 |   |
| Working capital                     |   | 22,048                |   | 23,974                  |   | 54,131 |   | 17,116 |   | 3,271 |   |
| Long-term liabilities               |   | —                |   | —                  |   | — |   | 131,795 |   | 147,152 |   |
| Redeemable preferred stock *        |   | 55,942                |   | 62,481                  |   | — |   | — |   | — |   |
| Shareholders’ equity (deficit) |   | 17,805                |   | 3,360                   |   | 87,500 |   | (69,903 | ) | (63,118 | ) |
|                                     |        |                       |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

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*    As we had not initiated the initial bankruptcy distribution untilApril 17, 2001, as of December 31, 2000, no shares of New Preferred wereactually outstanding as of such date.

 

We adopted fresh start reporting in our consolidated balance sheet asof December 31, 2000. The American Institute of Certified Public Accountants’Statement of Position 90-7, “Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code” (SOP 90-7), requires that, under certaincircumstances resulting from a bankruptcy, a new entity be created forfinancial reporting purposes upon the emergence of that entity from bankruptcy.  Accordingly, the value of the reorganizedenterprise becomes the established amount for the emerging balance ofshareholders’ equity, and any accumulated deficit of the predecessor entity isoffset against available paid-in-capital to result in an emerging retainedearnings of zero.  Additionally, assetsand liabilities were recorded at their fair values.

 

Since the financial information as of and subsequent to December 31,2000 has been prepared as if it is of a new reporting entity and is notcomparable to that of previous years, a black line has been used to separatenew entity information from prior entity information.  Financial information with regard to activity occurring prior toDecember 31, 2000 has been marked as “Predecessor”, and financial informationwith regard to activity as of December 31, 2000 and thereafter is marked hereinas “Successor”.  See also “Management’s Discussion and Analysis of Financial Condition andResults of Operations” for a discussion of the effects of this reportingadoption.

 

The value of the emerged enterprise used for fresh start reporting asof December 31, 2000 was $87.5 million and was determined by management withthe assistance of independent advisors. Themethodology employed involved estimation of enterprise value taking intoconsideration a discounted cash flow analysis. The discounted cash flow analysis was based on a seven-year cash flowprojection prepared by management, taking into consideration the terminal valueof its assets and liabilities as of immediately prior to its emergence frombankruptcy on December 18, 2000. Terminal values of assets and liabilities weredetermined based either on contracted amounts, actuarial present values and/ormanagement’s estimates of the outcome of certain operating activities. Thesepost-emergent matters consist largely of the retained operations discussed inthis Report. Net after-tax cash flows, assuming a 40% effective tax rate, werediscounted at approximately 17% in order to take into consideration the risksand uncertainties inherent in such projections. The cash flow projections werebased on estimates and assumptions about circumstances and events that have notyet taken place. Estimates and assumptions regarding individual retainedmatters that form the collective composition of the overall enterprise value asof December 18, 2000 are inherently subject to significant economic andcompetitive uncertainties and contingencies beyond the control of the Company.Accordingly, there may be differences between projections and actual resultsbecause events and circumstances frequently do not occur as expected and may besignificant. More specifically, assumptions within the valuation related to theamount and timing of the ultimate performance and related cash flows ofKaiser-Hill have the greatest impact to the overall enterprise valuation.

 

**Item 7.****       Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Item 7. has been divided into a discussion of ourfinancial conditions and results of operations after the bankruptcyreorganization (Successor Entity), which was effective December 18, 2000(immediately below through page 13), and results of operations of Kaiser GroupInternational prior to that date (on pages 13 of this Report).

 

**Kaiser Group Holdings, Inc.  (Successor Entity)**

* *

***Overview***

 

In the two years since the Plan of Reorganization of Kaiser GroupInternational, Inc. under Chapter 11 of the Bankruptcy Code became effective onDecember 18, 2000, we have consummated the initial bankruptcy distributions toallowed claimholders, continued to progress in resolving remaining outstandingbankruptcy claims, managed our remaining assets, and wound down unnecessaryelements of previous activities and corporate structure.

 

7

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Following the effectiveness of the Plan, we haveonly a limited number of activities, assets and liabilities, primarilyconsisting of the following:

 

•                  Weown Kaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd.  Kaiser-Hill is our major source ofincome.  Kaiser-Hill currently serves asthe general contractor at the U.S. Department of Energy’s Rocky FlatsEnvironmental Technology Site near Denver, Colorado.  The level of success experienced by Kaiser-Hill in achievingtimely closure of the Rocky Flats site, and the cost of achieving such closure,are the primary determinants of our long-term financial performance followingthe completion of the reorganization process.

•                  Wehave a substantial claim, pending resolution, against Nova Hut, a.s., the ownerof a steel mini-mill in the Czech Republic.

•                  ThroughSeptember 30, 2002 we held a minority ownership interest in ICF ConsultingGroup, Inc. (a division that Kaiser Group International, Inc. sold in1999).  We continue to hold an 8 1⁄2% subordinatedpromissory note of ICF Consulting due June 25, 2006 in the principal amount of$6.4 million as a result of that transaction.

•                  Wehave a wholly-owned captive insurance company that is no longer issuing newpolicies and is solely involved in resolving remaining claims made againstpreviously issued policies.

•                  Wehave an ongoing obligation to fund a capped, post-employment medical benefitplan for a fixed group of retirees.

 

*CriticalAccounting Policies and Significant Estimates*

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires that we make estimates andassumptions affecting the assets and liabilities (including contingent assetsand liabilities) reported at the date of the Consolidated Financial Statementsand the income statement amounts reported for the periods presented.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.

 

Our accounting measurements that are most affected by our estimates offuture events are:

 

•                  Recoverabilityof net assets of discontinued operations, notes receivable and accrued interest,and investments.

•                  Incometax provision, deferred tax assets and liabilities and related valuationallowance.

•                  Useof the equity method of accounting for Kaiser-Hill, an affiliate the Companyhas the ability to significantly influence but not control.  In accordance with the equity method ofaccounting, we record our proportionate share of the affiliate’s income orlosses.  The difference between thecarrying value of the joint venture investment and our underlying equity isamortized on a straight-line basis over the term of the joint ventureinvestment, estimated at six years.

•                  Estimatedfees on the Kaiser-Hill joint venture.  Estimating future costs and, therefore, revenues and profits, is aprocess requiring a high degree of judgment, including assumptions regardingfuture operations of Kaiser-Hill as well as general economic conditions.  In the event of a change in total estimatedcontract cost or profit, the cumulative effect of such change is recorded in theperiod the change in estimate occurs.  The period of performance of the Kaiser-Hill contract extends overa long period of time and, as such, revenue recognition and our profitabilityfrom this contract may be adversely affected to the extent that estimated costto complete or incentive or award fee estimates are revised, delivery schedulesare delayed, or progress under the contract is otherwise impeded.  Accordingly, our recorded revenues and grossprofits from year to year can fluctuate significantly.   The Kaiser-Hill contract contains incentiveprovisions for increased or decreased revenue and profit based on actualperformance against established cost targets and schedule-related goals.  Incentive fees are included in estimatedcontract revenue at the time the amounts can be reasonably determined and arereasonably assured based on historical experience and other objectivecriteria.  Should Kaiser-Hill fail toperform satisfactorily under its contract, previously recognized revenues couldbe reversed and/or future period revenues could be reduced.

•                  Ourliability in connection with a post-employment medical benefit plan for a fixedgroup of retirees.  This liability isaffected by changes in the discount rate, medical cost trend rates and certainactuarial assumptions.  Should actualrates and results differ from the assumptions used, revisions to the liabilitywould be required resulting in additional income statement charges.

 

**Results of Successor Operations**

 

*Years EndedDecember 31, 2002 and 2001*

 

*Equity IncomeIn Earnings of Affiliate*

 

8

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Our major remaining source of income is a 50% ownership in Kaiser-HillCompany L.L.C., which performs all elements of daily and long-term operationsassociated with the ultimate closure of the Department of Energy’s (DOE) RockyFlats site, including stabilizing and safely storing radioactive material,cleaning up areas contaminated with hazardous and radioactive waste, andrestoring much of the 6,000-acre Rocky Flats site to its natural state forfuture use by the public. Kaiser-Hill is owned equally by Kaiser Holdings andCH2M Hill Companies Ltd.  CH2M Hilldesignates three of the five members of Kaiser-Hill’s Board of Managers andKaiser Holdings designates two members. The financial information contained hereinfor Kaiser-Hill is reflected on the equity basis.  Because Kaiser-Hill represents a significant portion of ourfinancial position and results of operations, the audited financial statementsof Kaiser-Hill are included in this report (see pages F-23 to F-32).

 

On January 24, 2000, Kaiser-Hill was awarded thefollow-on Rocky Flats contract pursuant to which Kaiser-Hill is providingservices that will complete the restoration of the Rocky Flats site and closeit to DOE occupation (the Closure Contract). The Closure Contract becameeffective February 1, 2000 and terminated the remaining period of the formercontract as of January 31, 2000.

 

*ClosureContract Provisions for Revenue and Performance Award*

 

The economic terms of the Closure Contractprovide that Kaiser-Hill will earn revenue equal to the actual cost of physicalcompletion in addition to a performance fee based on a combination of theactual cost of completing the site closure project and the actual date ofphysical completion, both as compared to contracted targets.   The potential fee to be earned pursuant tothe Closure Contract ranges from $151.0 million to $463.0 million based onKaiser-Hill’s costs to complete the site closure being within the range oftargeted completion cost of $3.6 billion and $4.8 billion, and completion atvarious dates between 2005 - 2007. Physical completion for a total cost inexcess of the target cost would result in a reduction to the potential feebecause Kaiser-Hill will share 30% in all costs incurred in excess of thetarget.  Kaiser-Hill is also subject toa $20.0 million maximum penalty if the December 31, 2007 closure date is notmet.

 

From the inception of this contract in February2000 until December 31, 2000, uncertainties over the ability to accurately predictthe total cost at completion and date of completion made management chose aconservative course for revenue recognition whereby contract fee was recognizedfor financial reporting purposes at the minimum level, i.e. the $150.0 millionfee level on a straight-line basis over an estimated period of contractcompletion ranging from February 1, 2000 through December 31, 2007.

 

During early 2001, Kaiser-Hill reduced itsestimate of total cost at completion to $4.5 billion from the original$4.8 billion.  This reduction inestimated cost at completion had the financial statement result of increasingits accrual of the fee to be earned over the contract duration from $150.0million to $180.0 million.  Kaiser-Hillcontinued to make favorable progress on the Closure Contract during 2001 and,during the quarter ended December 31, 2001, amended its estimate for thephysical contract completion date from December 31, 2007 to December 31, 2006and changed its estimate of the total cost to be incurred during the ClosureContract duration to be below $4.0 billion. Therefore, Kaiser-Hill management increased its estimate of the fee tobe earned over the contract duration from the $180.0 million to $355.0 million.  Because Kaiser-Hill uses the percentage ofcompletion method for the performance fee recognition on the Closure Contract,the effect of increasing its performance fee estimate on the project from$180.0 million to $355.0 million resulted in recording additional earnings of$50.6 million as a change in estimate in the fourth quarter.  The additional earnings were offset by a$34.8 million reduction in net earnings resulting from the percentage ofcompletion effect of increasing certain project contingency reserves.  Therefore, the overall fourth quarteradjustment in 2001 was $15.8 million. Based on Kaiser-Hill’s favorable progress continued throughout 2002 andduring the quarter ended December 31, 2002, management reduced the amount ofproject contingency reserves by the exact amount as accrued a year earlier — thushaving the effect of increasing contract-to-date earnings by $34.8 million inthe fourth quarter of 2002.  Also duringthe fourth quarter of 2002, the DOE awarded Kaiser-Hill an additional $23.0million in fee based on Kaiser-Hill’s continued reductions in its estimates oftotal cost to complete the Closure Contract. Despite the uncertainties relative to Kaiser-Hill performing on theClosure Contract so as to earn a possible $378.0 million in total performance fee,Kaiser-Hill also has goals of further improving its ultimate projectperformance.  Goals are not free ofrisk, however, and the ability to accurately predict the ultimate results arehighly uncertain.  See “Risk FactorsRelative to Forward-Looking Statements”.

 

*ClosureContract Billing Provisions*

 

Through 2000, the Closure Contract allowed Kaiser-Hill to invoice DOEquarterly for the performance fee based on a $340.0 million target fee pool,less a 50% retainage. Thereafter, the quarterly invoicing reverted to a formulasuch that, unless otherwise approved by DOE, cumulative contract billings maynot exceed the minimum fee of $150.0 million spread over a seven-yeartimeframe.   In early 2002, based onDOE’s acknowledgement of and concurrence with Kaiser-Hill’s revised closureestimates and resulting increase to the estimated performance fee to be earnedover the contract duration, Kaiser-Hill

 

9

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was able to increase the amount of its performance fee invoices to DOEbased on the $355.0 million fee estimated to be earned upon projectcompletion.  However, such invoicesbecame subject to the 50% retainage holdback payable at contractcompletion.  In December 2002, Kaiser-Hill’scontinued favorable progress on the project resulted in an award by the DOE ofan additional $23.0 million in fee, of which Kaiser-Hill was able toretroactively invoice, and collect $10.0 million.  Adjusted for the effects of the 50% retainage holdback,Kaiser-Hill expects that its performance fee invoices to DOE will be approximately$7.1 million per quarter effective in the first quarter of 2003.

 

Fee payments made by DOE to Kaiser-Hill, less certain non-reimbursablecosts, will continue to be distributed to the joint venture owners uponreceipt.  Kaiser-Hill has historicallyincurred expenses that are not reimbursable by the DOE pursuant to the Federalregulations.  Accordingly such expenses,which Kaiser-Hill estimates could approximate up to 15% - 20% of the totalaward fee, would be deducted from the total fee earned by Kaiser-Hill prior toany distributions of net fees to either us or CH2M Hill Companies Ltd.  From thecommencement of the new Closure Contract through December 31, 2002, Kaiser-Hillhas received an aggregate of $75.0 million in fee from the DOE for such contractperformance.

 

In the future, as Kaiser-Hill continues to accrue performance fee basedon the $378.0 million level, less reserves deemed appropriate in thecircumstances, and remains subject to a 50% retainage holdback on itsperformance fee invoicing, the level of unbilled accounts receivable on itsbalance sheet will begin to increase substantially.  Kaiser-Hill will classify the 50% difference between recordedperformance fee and collected fee as long-term unbilled accounts receivable onits balance sheet, which will be included as a component of Investment inAffiliate on the Company’s balance sheet. The Closure Contract also contains provisions for DOE to releaseportions of the retainage holdback prior to contract completion if the DOEdeems appropriate.  Kaiser-Hill is notable to estimate whether any of the retainage holdback will be released priorto contract completion.

 

*Gain onDemutualization and Gain on Sale of Security*

 

During the year ended December 31, 2001, webenefited from the fact that we had purchased retirement annuity contractsduring the 1980’s for a capped group of employees.  Kaiser Group International, Inc. paid 100% of the premiums forthe retirement annuity contracts, and such annuities represented the entireamount of this particular retirement benefit obligation to the coveredemployees at the time.  Having paid 100%of the insurance premiums, we became a mutual stockholder in the PrudentialInsurance Company.  Due to the illiquidnature of ownership in a mutual stockholder organization, Kaiser GroupInternational, Inc. did not have a balance sheet carrying value ascribed tothis asset.  During November 2001,however, the Prudential Insurance Company demutualized its ownership structurethrough an initial public offering of its common stock.  As a result of the demutualization of thePrudential holdings, we became the beneficial holder of approximately 195,000shares of Prudential common stock and accordingly recorded a gain on the demutualizationtotaling $5.9 million, net of income tax expense of $2.2 million, in December2001.

 

In February 2002, we sold all of our shares ofPrudential common stock, and an additional gain of $0.1 million was recorded onsale of security.

 

*Gain on Sale of Investment*

 

On September 30, 2002, the terms of a settlementagreement with ICF Consulting Group, Inc. (ICF Consulting) wereimplemented.  Under this settlement, werestructured the ICF Consulting notes totaling $6.6 million and accruedinterest of $0.7 million, net of reserves, for a new subordinated promissorynote of $6.4 million, resulting in a write-off of $0.8 million andestablishment of a $0.5 million contingency reserve.  In return ICF Consulting withdrew its claims against us, releasedcash in escrow totaling $0.8 million and purchased our 10% ownership in ICFConsulting, carrying value of $1.1 million, for $4.5 million.  We recorded a gain of $3.4 million on thesale of the investment in ICF Consulting.

 

*Write-off of Notes Receivable and Accrued Interest*

 

As a result of theabove-mentioned settlement agreement with ICF Consulting, we recorded the newICF Consulting note of $6.4 million and wrote off the remaining balance in thenotes receivable and accrued interest totaling $0.7 million.  Inlight of the fact that ICF Consulting had defaulted on the previously held ICFConsulting notes and the subordinated nature of the new note, we have alsorecorded a reserve of $0.5 million dueto uncertainties as to the ultimate collectibility of the new note and accruedinterest.

 

*InterestIncome*

 

Interest income in 2002 declined by $0.3 milliondue primarily to the partial forgiveness of interest income on the notereceivable from ICF Consulting.  (Seeabove discussion related to settlement with ICF Consulting.)

 

10

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Interest income earned in 2001 was based in parton available cash balances, generally asset sale proceeds remaining from 2000and restricted cash balances maintained for statutory purposes by ourwholly-owned captive insurance subsidiary and amounts required under the Planof Reorganization. As we used $13.7 million in cash in April 2001 for ourinitial bankruptcy distribution, interest income declined by $0.6 millionduring 2001 compared to 2000 and will likely decline in the future based onsignificant reductions in interest rates during 2002.  Interest income will also decline based on the Plan ofReorganization requiring potentially large amounts of available cash balancesto be used for purchasing or redeeming outstanding preferred stock once allremaining bankruptcy claims are resolved. Based on the developments in 2001, werecorded a $1.0 million reserve for uncertainties related to the collectibilityof the ICF Consulting promissory notes and the related accrued interest. Thisreserve was recorded as a reduction to interest income as it had the effect ofreversing the interest accrued on the notes during 2001.

 

*AdministrativeExpenses*

 

Administrative expenses for the years endedDecember 31, 2002 and 2001 consisted largely of salaries, legal andprofessional fees incurred for activities associated with the bankruptcyproceedings or with winding down of historical operations as well as the costto fund a certain retiree medical commitment. Administrative expenses for the year ended December 31, 2002 compared toDecember 31, 2001 declined by $2.7 million primarily due to a $1.6 millionreduction in legal and professional fees incurred for bankruptcy claimsresolution, including the Nova Hut and ICF Consulting claims, a $0.7 millionreduction in salaries and benefits, and a $0.4 million reduction in rent. Theexpense for the retiree medical commitment remained relatively unchanged from2001 to 2002 at approximately $1.0 million per year.  As we continue to make progress on winding down the operations ofKaiser Group International, Inc. and in resolving remaining bankruptcy claims,we anticipate further declines in general and administrative spending.

 

In the fourth quarter of2001, we recorded a $1.1 million impairment charge related to our then 10%interest in ICF Consulting Group, Inc., a privately held entity that wasretained by Kaiser Group International, Inc. when it sold its Consulting Groupin June 1999.  The impairment charge wasbased on management’s assessment of the potential proceeds available if thisinvestment were liquidated.

 

*Loss fromDiscontinued Operations*

 

In addition to matters surrounding the resolutionof the Nova Hut dispute, Discontinued Operations also reflects the net incomestatement activity resulting from the winding down of the discontinuedengineering operations.  During 2002, wesuccessfully prosecuted an aged claim against a former subcontractor andcollected an account receivable, from a previous foreign engineering project,that had previously been written off. Net of legal fees, these activities resulted in the Company’s collectionof $0.6 million. In 2001, based on our continued concern over Nova Hut’sfinancial difficulties and the uncertainties of a settlement involving abankruptcy court-sponsored mediation, we reserved approximately $15.6 millionof the carrying value of the remaining Nova Hut project assets from $21.6million to $6.0 million.  We alsorecorded an income tax benefit of $6.2 million associated with this reserve.Other out-of-pocket costs were incurred for winding down the project’s siteoperations during early 2001, including severance and relocation costs forreturning project expatriates back to the United States.

 

*Income Taxes*

 

During 2002, we recognized a total incometax expense of $11.6 million allocable to the following results (in thousands):

 

| **Statements  of Operations Category**                |   | **Pre-tax  Income/(Loss)** |   | **Applicable  Income Tax  (Expense)/Benefit** |    |
|-------------------------------------------------------|--------|----------------------------|--------|-----------------------------------------------|---------|
| Income from continuing operations before income taxes |   | $                          | 29,165 |                                          | $       | (11,319 | ) |
| Income/(Loss) from discontinued operations            |   | 847                        |   | (350                                          | )       |
|                                                  |   |                       |   | $                                             | (11,669 | ) |
|                                                       |        |                            |        |                                               |         |  |  |

 

During 2001, we recognized a total incometax benefit of $3.8 million allocable to the following results (in thousands):

 

| **Statements of Operations Category**                  |   | **Pre-tax  Income/(Loss)** |   | **Applicable  Income Tax  (Expense)/Benefit** |   |
|--------------------------------------------------------|--------|----------------------------|--------|-----------------------------------------------|--------|
| Income from  continuing operations before income taxes |   | $                          | 7,657  |                                          | $      | (2,417 | ) |
| (Loss) from  discontinued operations                   |   | (16,409                    | )      | 6,212                                         |   |
|                                                   |   |                       |   | $                                             | 3,795  |   |
|                                                        |        |                            |        |                                               |        |  |  |

 

11

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*Treatment of Net Operating LossCarryforwards*

 

In December 2000 we went through a change in control as defined underthe Internal Revenue Code (IRC) Section 382 due to the Chapter 11 bankruptcyreorganization.  In September 2001 wedetermined that the change in control met the stringent guidelines of thebankruptcy exception provided under the Internal Revenue Code.   This resulted in our not being subject tothe carryforward limitations of IRC Sec. 382. However, we were required to reduce certain carryovers that included netoperating losses and credits.  We offsetthe reduction of the carryforwards with the valuation allowance previouslyestablished for those carryforwards, and, as a result, the effective income taxrate for income from continuing operations differed significantly fromstatutory rates.

 

**Liquidity and Capital Resources**

 

*Year EndedDecember 31, 2002 and 2001*

 

Operating Activities:  We used $6.3 million in cash for operating activities in 2002 and$13.3 million in 2001.  This use of cashincluded $7.0 million and $9.7 million, respectively, for general andadministrative expenses incurred during 2002 and 2001.  Additionally, in 2001 we used $3.6 millionfor severance and professional fees incurred prior to 2001 in connection withthe debt restructuring, bankruptcy and winding-down activities in 2000 and $0.6million in cash used to satisfy Class 3 bankruptcy claims (former tradeaccounts payable not paid until after the Plan of Reorganization was deemedeffective in December 2000).

 

Investing Activities:  During the years ended December 31, 2002 and 2001, Kaiser-Hilldistributed $15.7 million and $7.9 million each to us and to the other 50%owner, CH2M Hill.   For the year endedDecember 31, 2002, we also received $4.5 million from the sale of ourinvestment in ICF Consulting and $6.0 million from the sale of our Prudentialsecurities.

 

Financing Activities:  During the years ended December 31, 2002 and 2001, we paid $4.2million and $2.4 million, respectively, in dividends on our preferred stock,and in 2002 we acquired 119,587 shares of preferred stock for $4.0million.  As a result of the Prudentialstock sale and the sale of the investment in ICF Consulting discussed above, weare required, in accordance with the Plan, to use a portion of the proceedsfrom any asset sales solely for the redemption of the outstanding preferredstock.  Pursuant to this requirement, weearmarked approximately $4.5 million of the sale proceeds as restricted cash tobe used for the future preferred stock redemptions.

 

During 2002, $0.8 million of restrictedcash was released as a part of the settlement agreement with ICF Consulting and$0.6 million of restricted cash in our captive insurance company was releasedfrom restriction by the insurance regulators.

 

On January 31, 2003, we used cash totaling $15.5million to redeem 282,000 shares of outstanding preferred stock in accordancewith the terms of the Kaiser Group International Plan of Reorganization and theKGP put rights described in Note 9 to the Consolidated Financial Statements.  Our Board of Directors will continue toevaluate on a quarterly basis additional redemptions of preferred stock.

 

At several times during 2001, but primarily inApril 2001 as part of our initial bankruptcy distribution, we paid out $13.7million representing the cash portion of Class 4 bankruptcy claimresolutions.  Also as of April 2001, wetransferred $12.3 million to a separate reserve cash account to be used to fundthe cash portion of any remaining Class 4 bankruptcy claims settlements(including any earned dividends on subsequently issued preferred stock). InJune 2001, we used $125,000 to finalize a tender offer to repurchase odd-lotshares of less than 99 in total holdings at $5.00 per common share.

 

*Liquidity andCapital Resources Outlook*

 

We currently have no debt as a result of the effectiveness of the Planof Reorganization. We have financed the initial bankruptcy distributionrequirements and follow-on working capital needs in part through the use of theavailable cash and distributions from Kaiser-Hill and from other asset saleproceeds. Based on (i) current expectations for operating activities andresults, (ii) expected Kaiser-Hill distributions, (iii) our current availablecash position, (iv) recent trends and projections in liquidity and capitalneeds, and (v) current expectations of total allowed claims upon the completionof the bankruptcy proceedings, management believes we have sufficient liquidityto cover the required cash distributions resulting from the resolution ofclaims in the bankruptcy process, our future operating needs and income taxrequirements, as well as the dividend requirements applicable to the ourpreferred stock.  Furthermore, asallowed Class 4 claims are resolved, we will continue to review the timing ofadditional partial preferred stock redemptions.

 

We have obligations to pay dividends onoutstanding preferred stock at December 31, 2002.  Accordingly, we are required to

 

12

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present the following table assuming that no additionalpreferred stock redemptions are made until the mandatory redemption date ofDecember 31, 2007, no additional shares are issued and that all futuredividends are paid in cash (irrespective of this disclosure requirement, we arenot representing intentions with regard to the timing of additional preferredstock redemptions).  The effect theseobligations are expected to have on our liquidity and cash flow in futureperiods are as follows (adjusted for the preferred stock redemption of $15.5million on January 31, 2003):

 

|                      |   | **Total** |   | **Less Than One  Year** |   | **One to Three  Years** |   | **After Three  Years** |   |
|---------------------------|--------|-----------|--------|-------------------------|--------|-------------------------|--------|------------------------|--------|
| Preferred Stock dividends |   | $         | 14,878 |                    | $      | 3,175                   |   | $                      | 5,851  |   | $ | 5,852 |   |
|                           |        |           |        |                         |        |                         |        |                        |        |  |  |  |  |

 

*Other Matters*

 

We have various obligations and liabilities fromour continuing operations, including general overhead expenses in connectionwith maintaining, operating and winding down various entities.  Additionally, we believe contingentliabilities may exist in the areas described in Note 7 to the ConsolidatedFinancial Statements for the periods ended December 31, 2002 and 2001.

 

**Results of Operations of Kaiser Group International, Inc.(Old Kaiser) (Predecessor Entity) Prior to Effectiveness of Plan ofReorganization–Prior to 2001**

 

The following discussion is intended to assist inan understanding of the historical results of operations of Old Kaiser for theyear ended December 31, 2000 and should be read in conjunction with thefinancial statements of the Company appearing elsewhere in this Report. Thecombined net financial position, operating results and cash flows of theoperating divisions that were divested in 2000 and 1999 have been presented inthe accompanying Consolidated Financial Statements as discontinued operationsfor all periods presented.

 

**Overview**

 

Old Kaiser’s business operations and financialcondition were significantly impaired in 1998 and 1999 as a result ofsubstantial difficulties and financial losses encountered in the execution byits Engineering and Construction Group (E&C Group) of four largefixed-price contracts to construct nitric acid plants. Pursuant to a planintended to restore Old Kaiser to profitability, two other unrelated operatinggroups were sold in 1999, a realignment of the retained E&C Group waspaired with substantial reductions in overhead spending, and a restructuring ofthe then existing debt was proposed, subject to obtaining credit arrangementsproviding adequate working capital.

 

Although Old Kaiser was able to obtain necessaryshareholder approvals and senior subordinated noteholders agreed to participatein a debt restructuring plan, consummation of such a plan remained conditionedon Old Kaiser’s ability to obtain a new revolving credit facility satisfactoryto Old Kaiser and an unofficial committee of the senior subordinatednoteholders. The proposals ultimately received from potential lenders did notprovide Old Kaiser with a facility that was compatible with Old Kaiser’sprojected needs. For this reason and due to the continued disappointingfinancial performance of Old Kaiser’s engineering operations, Old Kaiserdelayed implementation of the proposed debt restructuring and reopenednegotiations with the unofficial committee of noteholders and potentiallenders. Following additional attempts to effect a debt restructuring and anevaluation of various potential strategic alternatives, including the sale ofassets or businesses, in 2000 Old Kaiser announced the intention to sell themajority of its remaining E&C Group in two separate transactions and torestructure its debt in a voluntary and pre-arranged bankruptcy proceeding.

 

Accordingly, on June 9, 2000, Old Kaiser and 38of its wholly-owned domestic subsidiaries (the Debtor Entities) filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the District of Delaware. Thesubsidiaries that did not file petitions for relief under Chapter 11 arereferred to herein as the Non-Debtor Entities. Old Kaiser continued to operatethe Non-Debtor Entities’ businesses in the ordinary course and operated theDebtor Entities’ businesses as debtor-in-possession. As such, the DebtorEntities were authorized to operate their businesses in the ordinary course butwere not allowed to engage in transactions outside the ordinary course of businesswithout Bankruptcy Court approval.  Asof December 18, 2000, Old Kaiser’s Plan became effective and the day-to-dayoperations of its Debtor Entities were no longer subject to Bankruptcy Courtsupervision.

 

Upon obtaining the necessary Bankruptcy Court approvals,the sales of the majority of Old Kaiser’s E&C Group were completed asfollows:

 

•                  Infrastructureand Facilities: The Bankruptcy Court approved the sale of the Infrastructureand Facilities line of business on July 17, 2000. On July 28, 2000, Old Kaisercompleted the sale of this line of business, which

 

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providedengineering services to clients around the world in the transit andtransportation, facilities management, water/wastewater treatment, andmicroelectronics and clean technology sectors. In this transaction,substantially all of the assets of this business line were sold to Tyco GroupS.A.R.L., the Earth Tech unit of Tyco International Ltd., for a cash purchaseprice of approximately $30 million.

•                  Metals,Mining and Industry: The Bankruptcy Court approved the sale of the Metals,Mining and Industry line of business on August 17, 2000. Effective as of August18, 2000, Old Kaiser completed the sale of this line of business, whichprovided engineering services to clients around the world in thealumina/aluminum, iron and steel, and mining industry sectors. In thistransaction, substantially all of the assets of this business line were sold toHatch Associates, Inc., a subsidiary of The Hatch Group of Canada, for a cashpurchase price of approximately $7.0 million.

 

The sales of these operating divisions constituted “discontinuedoperations” in accordance with generally accepted accounting principles. AllStatement of Operations data contained elsewhere in this Report depict theresults of operations from continuing operations separately from discontinuedoperations and related gains/(losses) on the sales of such operations.

 

Cash proceeds from the 2000 asset sales were subsequently used, in part,to fund operating liquidity needs, and in part, to pay certain portions ofpre-bankruptcy liabilities, to pay bankruptcy claims settlements and in part topay dividends on preferred stock issued pursuant to the bankruptcy proceedings.

 

**Results of Predecessor Operations**

 

*Period Ended December 31, 2000*

 

Old Kaiser completed the following business unit divestitures during2000:

 

•                  TheInfrastructure and Facilities line of business was sold on July 28, 2000 toTyco Group S.A.R.L., the EarthTech unit of Tyco International Ltd., for a cashprice of approximately $30 million.

•                  TheMetals, Mining and Industry line of business was sold as of August 18, 2000 fora cash price of approximately $7.0 million.

 

The sales of these lines of business constituted “discontinuedoperations” in accordance with generally accepted accounting principles.  Accordingly, all Statement of Operationsdata contained elsewhere in this Report depict the results of operations fromcontinuing operations separately from discontinued operations and relatedgains/(losses) on the sales of such operations.

 

*Components of Gross Margin*

 

After the business unit sales described above, all remaining componentsof 2000 gross margin, consisting of revenue less subcontractor costs lessdirect labor and related fringe benefits, were solely attributed to theCompany’s 50% ownership of Kaiser-Hill.

 

Prior to June 8, 2000, through a designated majority representation onKaiser-Hill’s board of managers, the Company had a controlling interest inKaiser-Hill and therefore consolidated Kaiser-Hill’s results of operations withthose of its only other remaining business segment, E&C Group.  Effective June 8, 2000, the Company adoptedthe equity method of accounting for Kaiser-Hill coincident with its signing ofan agreement whereby the other 50% owner assumed the right to designate 3 outof the 5 members of Kaiser-Hill’s board of managers. The Company retained theright to designate 2 out of the 5 members of the Kaiser-Hill board of managers.Accordingly, the financial information contained herein for Kaiser-Hill isreflected on a consolidated basis for all periods presented through June 8,2000, and on the equity basis for financial information applicable for periodsafter June 8, 2000.

 

Effective February 1, 2000, Kaiser-Hill wasawarded a new contract pursuant to which Kaiser-Hill is providing services thatwill complete the restoration of the Rocky Flats site and close it toDepartment of Energy occupation.  Theeconomic terms of the new contract provide that Kaiser-Hill will earn revenueequal to the actual cost of completing the project in addition to a performancefee based on a combination of the actual cost of completing the site closureproject and the actual date of completing the project.  The performance fee will be based on targetsin the contract for the cost and date of completing the project.

 

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The Kaiser-Hill impact to our overall financial results for the yearended December 31, 2000 was as follows (in thousands):

 
| As Previously Consolidated and Reported:                                                           |   |     |    |
|----------------------------------------------------------------------------------------------------|--------|----------|---------|
| Gross Revenue                                                                                      |   | $        | 271,385 |   |
| Subcontracts and materials                                                                         |   | (195,367 | )       |
| Service Revenue                                                                                    |   | 76,018   |    |
| Operating Expenses:                                                                                |   |     |    |
| Direct labor and fringe                                                                            |   | 64,197   |    |
| Operating Income                                                                                   |   | $        | 11,821  |   |
| Interest, net                                                                                      |   | 178      |    |
| Other Owner’s Interest in Operating Income                                                    |   | (5,999   | )       |
| Subtotal of Consolidated Results                                                                   |   | 6,000    |    |
| Effect of change in accounting to equity method in June 2000:                                      |   |     |    |
| Equity in unconsolidated earnings of affiliate                                                     |   | 4,218    |    |
| Equity in income of affiliate as if the change to the equity method had  been applied historically |   | $        | 10,218  |   |

 

The net operating results for the Company’s 50%owned portion of the Kaiser-Hill subsidiary are reflective of Kaiser-Hill’srecognition of a $7.0 million performance fee that was awarded upon the January2000 completion and closeout of the original Rocky Flats contract. On January24, 2000, Kaiser-Hill was awarded the follow-on contract pursuant to whichKaiser-Hill is providing services that will complete the restoration of theRocky Flats site and close it to DOE occupation (the Closure Contract). TheClosure Contract became effective February 1, 2000 and terminated the remainingperiod of the former contract as of January 31, 2000.

 

*Administrative Expenses*

 

The administrative expenses incurred during the year ended December 31,2000 consisted largely of costs incurred for activities which supported thebusiness units that were divested early in 2000 and of costs incurred as partof the debt restructuring activities, bankruptcy proceedings and otheractivities aimed at winding down of our historical operations.

 

*Depreciation and Amortization*

 

Depreciation and amortization expense for 2000were related to the remaining amounts of goodwill and other intangibleacquisition costs that were written off upon the consummation of asset sales in2000. As of December 31, 2000, all such goodwill and intangibles had beeneliminated from the balance sheet.

 

*Restructuring Charges*

 

In connection with its plan to re-align itselfprior to its decision to proceed with the voluntary bankruptcy, Old Kaiserincurred charges for restructuring of $1.9 million during 2000. Components ofthe charges included amounts for severance and related matters, the write-offof goodwill associated with the discontinuance of operations from a prioracquisition, a write-down of the impairment of certain long-term investments,professional fees associated with the debt restructuring, a charge for businessunit divestiture costs and for anticipated sublease losses and officerealignment and closings.

 

*Equity Income in Earnings ofAffiliate*

 

Effective June 8, 2000, the Company adopted the equity method ofaccounting for Kaiser-Hill coincident with its signing of an agreement wherebythe other 50% owner assumed the right to designate 3 out of the 5 members ofKaiser-Hill’s board of managers. Accordingly, the financial informationcontained herein for Kaiser-Hill is reflected on the equity basis for periodsafter June 8, 2000.  The amount reportedfor 2000 represents the Company’s 50% ownership of the results of Kaiser-Hill’soperations from June 9 through December 31, 2000.

 

*Interest Income*

 

Interest income was earned on available cash balances that weregenerated primarily from the unused proceeds from the 1999 asset sales and fromthe $6.5 million in promissory notes resulting from the asset sales. Prior tothose sales, available cash balances were largely attributable only toKaiser-Hill and Old Kaiser’s foreign operations. All other cash not requiredfor operations was historically used to pay down outstanding borrowings.Interest income of $1.0 million earned on cash balances generated from theunused proceeds of the 2000 divestitures has been classified as a reduction toReorganization Items in the

 

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Statement of Operations pursuant to the requirements of SOP 90-7, sincethe available cash balances were generated as a result of the bankruptcyproceedings.

 

*Interest Expense*

 

The total interest expense incurred in 2000 was primarily attributableto the 13% interest expense accruing on $125.0 million of outstanding seniorsubordinated notes due 2003 (Old Subordinated Notes) through June 9, 2000(interest stopped accruing on the Old Subordinated Notes effective as of June9, 2000, the date of the bankruptcy filing). The interest on the Old  Subordinated Notes for this period was notpaid in 2000 but rather was allowed as a claim of the noteholders along withthe principal amount of their Old Subordinated Notes. Interest expenseapproximating $0.1 million was also incurred on the remaining $1.0 million ofSenior Notes that were paid off entirely by Old Kaiser on September 12,2000.  Net of the write off ofunamortized original issue costs, Old Kaiser recognized an extraordinary losson the early extinguishment of Senior Notes totaling $0.1 million.

 

*Reorganization Items*

 

The $8.6 million reported in 2000 as reorganization items consisted ofessentially two types of matters:

 

•                  Reorganizationmatters: During the year ended December 31, 2000, Old Kaiser incurredapproximately $7.6 million in costs associated with its bankruptcy activities,including third-party professional fees, court fees, printing and mailingcosts, and severance and staff retention costs. Interest income ofapproximately $1.0 million, earned on the available cash proceeds resultingfrom the asset sales in July and August 2000, has been classified as areduction to reorganization costs pursuant to the provisions of SOP 90-7.

•                  Freshstart adjustments: The Company adopted fresh start reporting (See Item 6. —“Selected Financial Data”) in its consolidated balance sheet as of December 31,2000 and recorded a net increase to book value totaling $15.2 million resultingfrom the adjustments to the individual assets and liabilities in Old Kaiser’sStatement of Operations. This overall increase consisted of the write off ofthe net book value of abandoned fixed assets and capitalized software, the netincrease in the carrying value of certain long-lived assets, predominantlyattributable to the 50% ownership in Kaiser-Hill, the increase in the carryingvalue of the retiree medical obligation to reflect current actuarial estimates,and the reduction of certain other accrued expenses deemed in excess of theestimated requirements.  The increase inthe carrying value of the Kaiser-Hill investment will be required to beamortized in the future, over the asset’s estimated life, to the extent thatsuch carrying value exceeds 50% of the underlying Kaiser-Hill equity.

 

*Income Tax Benefit*

 

The income tax provision for all periods presented excludes theelements of Kaiser-Hill’s operating income that were owned by another companysince Kaiser-Hill is a flow-through entity for income tax purposes.

 

The Statements of Operations report numerous unusual transactionswhich, pursuant to generally accepted accounting principles, must be reportedseparately and distinctly from the ongoing operating activities of the Company.The effects of these transactions upon the Statements of Operations are alsorequired to be presented net of related income tax effects. Accordingly, theoverall income tax result of Old Kaiser’s activities during 2000 is reflectedon various different line items of the Statements. The following tabularpresentation attempts to identify the financial impact of the unusualtransactions along with their related income tax consequence. In 2000, theCompany recognized a total net income tax benefit of $9.0 million attributableto the following elements on the Statements of Operations (in thousands):

 
| **Statement of Operations Category**                   |   | **Pre-Tax  Income/(Loss)** |   | **Applicable  Tax  (Expense)/Benefit** |   |
|--------------------------------------------------------|--------|----------------------------|--------|----------------------------------------|--------|
| Income from continuing  operations before income taxes |   | $                          | 6,875  |                                   | $      | 39,521 |   |
| (Loss) from  discontinued operation                    |   | (2,072                     | )      | (894                                   | )      |
| (Loss) on sale  of discontinued operations             |   | (662                       | )      | (7,007                                 | )      |
| Extraordinary  gain from the discharge of indebtedness |   | 147,206                    |   | (22,664                                | )      |
|                                                   |   |                       |   | $                                      | 8,956  |   |
|                                                        |        |                            |        |                                        |        |  |  |

 

The asset sales of the E&C Group in 2000 created taxable incometotaling $18.5 million, and the reorganization in bankruptcy generated $59.7million of debt forgiveness income pursuant to Internal Revenue Code Sec. 108,and thereby enabled the Company to recognize a benefit in the current year forits current year operating loss and for certain previously generated netoperating loss carryforwards. Additionally, in 2000 the Company adjusted itsincome tax payable downward by $4.7 million,

 

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primarily related to a previous over-accrual for foreign earnings. Asof December 31, 2000, the Company carried a valuation allowance against theentire remaining deferred tax asset available of $13.2 million.

 

*Minority Interest in Net Income ofSubsidiaries*

 

Minority interest represents the net amount of Kaiser-Hill’s earningsthat were due to the other 50% owner for periods in which Old Kaiserconsolidated the results of the Kaiser-Hill entity.

 

*Loss from Discontinued Operations*

 

Summarized results for the discontinued segments for the year endedDecember 31, 2000 are as follows (in thousands):

 

| Gross Revenue                                                  |   | $       | 158,724 |   |
|----------------------------------------------------------------|--------|---------|---------|--------|
| Subcontracts and  materials                                    |   | (97,210 | )       |
| Equity in  unconsolidated affiliates                           |   | 1,275   |    |
| Service Revenue                                                |   | 62,789  |    |
|                                                           |   |    |    |
| Operating  Expenses:                                           |   |    |    |
| Direct labor and  fringe                                       |   | 40,606  |    |
| Administrative  expenses                                       |   | 23,225  |    |
| Depreciation and  amortization                                 |   | 1,030   |    |
| (Loss) from  discontinued operations before income tax expense |   | $       | (2,072  | )      |

 

The combined net financial position and operating results of theE&C Group have been presented in the accompanying consolidated financial statementsas discontinued operations for all periods presented. The net operating resultsof the discontinued segments, using historical and consistent internalreporting practices, have been included in the accompanying financialstatements in accordance with generally accepted accounting principles.Accordingly, these net results are not intended to reflect the operatingresults of these businesses had they been treated as stand-alone operationswithin Old Kaiser. Rather, these results represent the net contributions to theoverall Old Kaiser operations that resulted from providing direct sales andservice to customers and do not necessarily include the effects of theallocation of certain administrative and indirect support costs necessary for astand-alone business.

 

*Gain (Loss) on Sales of DiscontinuedOperations*

 

Concurrent with its voluntary bankruptcy filing, Old Kaiser announcedon June 9, 2000 that it would sell nearly all of its interests in the remainingengineering lines of business, previously providing design, engineering,procurement, and construction and project management services to domestic andinternational clients in the infrastructure, facilities, metals, mining andindustrial markets. The E&C Group was sold in two separate transactions duringthe third quarter of 2000 for proceeds totaling $37.0 million before workingcapital transfers of $7.9 million. Old Kaiser recognized a pre-tax net loss forfinancial reporting purposes of approximately $(0.7) million. Taxable incomegenerated after adjusting this loss for items that are not deductible forfederal income tax purposes, such as associated goodwill and intangible assetwrite-offs, totaled $19.2 million, and resulted in income tax expense ofapproximately $7.0 million, resulting in a total after tax loss for financialreporting purposes of approximately $(7.7) million. Approximately $7.0 millionof this loss has been offset by an equal income tax benefit recognized onpreviously unbenefitted net operating losses.

 

*Extraordinary Items*

 

Effective as of December 18, 2000, the Company recognized anextraordinary gain on recording the effectiveness of Old Kaiser’s Plan ofReorganization and the exchange and discharge of an estimated $150.0 million inAllowed Claims for a combination of cash, New Preferred and New Common. Thegain was computed based on the terms of the Plan whereby the claim holders willreceive a combination of cash and Preferred Stock equal to 55% of the facevalue of the Allowed Claims. The extraordinary gain totaled $147.2 million,before income tax expense of $22.7 million.

 

*Liquidity and Capital Resources*

 

Operating activities: Old Kaiser recorded $16.5million in cash generated from Kaiser-Hill operations prior to deconsolidatingthe Kaiser-Hill results in its financial reporting in June 2000 (an additional$5.0 million in 2000 distributions from Kaiser-Hill are reflected as receiptsfrom investing activities).  In additionto approximately $2.0 million in interest income earnings, Old

 

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Kaiser used $21.9 million of cash in operatingactivities: $14.7 million was used to fund continued operating losses of theE&C Group; $4.8 million was used for severance and professional feesincurred in connection with its debt restructuring, bankruptcy and winding-downactivities; $2.0 million was used to pay for the 1999 pension obligation onSeptember 15, 2000; and approximately $2.2 million was used for the payment ofincome taxes resulting from the 1999 asset sale gains.

 

Investing activities:   TheE&C Operations were sold in two separate transactions during the thirdquarter of 2000 for proceeds totaling $37.0 million before working capitaltransfers of $7.9 million.  Also duringthe first quarter of 2000, Old Kaiser sold its 35% interest in an environmentalholding company based in France, generating approximately $0.7 million in cashfrom investing activities. The deconsolidation of Kaiser-Hill from itsfinancial statements in June 2000 accounted for a reduction in cash of $5.2 million,and Kaiser-Hill distributed $5.0 million equally to its two owners (after thedate of deconsolidation).

 

Old Kaiser had a 4% ownership interest in alimited liability company (the LLC) that leased the land and owned thebuildings leased primarily by Old Kaiser for its corporate headquarters.  Effective October 28, 2000, Old Kaiseramended the terms of the building investment agreement assigning all subleasesto the LLC, discontinuing all leased space except for month-to-month on asignificantly reduced portion of space, eliminating future capitalcontributions and fixing the maximum amount of the potential future recovery ofthe investment to $2.8 million at whatever time as the property is sold orrefinanced. The excess remaining carrying value of the investment over $2.8million and the unamortized transaction costs associated with the originalinvestment of $1.9 million were written-off due to their impairment. Prior tothe amendment, Old Kaiser had a commitment to make additional annual capitalcontributions to the LLC totaling $600,000 annually during each of the firstthree years and $700,000 annually during each of the fourth through ninth yearsof the LLC. The ownership in the LLC would have increased to 16% in fixedannual 2.4% increments in each of the eleventh through fifteenth years of theagreement. A total of $600,000 was paid toward this commitment during  2000.

 

Financing activities:  During the year ended December 31, 2000 and before the date ofdeconsolidation, Kaiser-Hill distributed $8.3 million to each of Old Kaiser andits other 50% owner - CH2M Hill. The distribution to the other 50% owner ofKaiser-Hill reflected in the accompanying Statements of Cash Flows representsthe portion of the $13.3 million that was distributed to CH2M Hill for theportion of the year during which Old Kaiser consolidated the results fromKaiser-Hill for financial reporting purposes. On September 12, 2000, Old Kaiserrepurchased the remaining $1.0 million in outstanding Senior Notes plus accruedinterest since January 1, 2000.

 

As of December 31, 2000, the Company had $12.7million in letters of credit outstanding, collateralized by restricted cashbalances, $11.1 million of which was for the Nova Hut project. On February 16,2001, Nova Hut drew against the $11.1 million letter of credit prior to itsexpiration on March 5, 2001 and $0.4 million remained as cash collateral forother outstanding letters of credit (see “Results of Successor Operations”,page 8, for update to the status of the Nova Hut project).  Additionally, pursuant to the current termsof the Nova Hut contract and upon the acceptance of the mini-mill, the Companyis required to have issued a twelve-month warranty letter of credit totaling$16.0 million. Until such time as such a revised letter of credit is provided,however, the Company believes that $11.0 million held in retention by thecustomer is sufficient to cash collateralize the requirement in the event it isnot addressed by a letter of credit.

 

**New AccountingPronouncements**

 

In June 2002, the FASB issued FAS 146, *Accountingfor Costs Associated with Exit or Disposal Activities*, whichaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (EITF) 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*. FAS 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred as opposed towhen an entity commits to an exit plan as prescribed under EITF 94-3.  FAS 146 also establishes that the initialliability be measured at fair value. FAS 146 is effective for activities that are initiated after December31, 2002 and management does not believe its adoption will have a materialimpact on the financial statements of the Company.

 

**RISK FACTORS RELATING TO**

**FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-K contains, and our periodic filings withthe Securities and Exchange Commission andwritten or oral statements made by our officers and directors to press,potential investors, securities analysts and others, may contain,forward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are nothistorical facts, but rather are predictions and generally can be identified byuse of statements that include phrases such as “believe,” “expect,”“anticipate,” “estimate,” “intend,” “plan,” “foresee” or other words or phrasesof similar import.  Similarly,statements that describe or containinformation related to matters such as our intent, belief, or expectation withrespect to financial performance, claims

 

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resolution, cash availability, stock redemptionplans, contract awards and performance, potential acquisitions and jointventures, and cost-cutting measures are forward-looking statements. Theseforward-looking statements often reflect a number of assumptions and involveknown and unknown risks, uncertainties and other factors that could cause ouractual results to differ materially from those currently anticipated in theseforward-looking statements.  In light ofthese risks and uncertainties, including those described below, theforward-looking events might or might not occur.

 

**Our long-term future profitability issignificantly tied to Kaiser-Hill, which is subject to uncertainties that mayadversely affect our operating results.**

 

*The fee incomewe will receive from Kaiser-Hill is dependent upon the ability of Kaiser-Hillto close the Rocky Flats site at a predetermined targeted cost of between $3.6billion and $4.8 billion and closing date of not later than March 31, 2007,both of which are uncertain.*

 

Our long-term future profitability will be dependent, to a significantextent, on the performance of Kaiser-Hill under its contract with theDepartment of Energy.  Kaiser-Hill servesas the general contractor at the Rocky Flats Environmental Technology site nearDenver, Colorado, a former nuclear weapons production facility.  Kaiser-Hill’s contract with the Departmentof Energy includes a performance fee based upon a combination of the actualcosts incurred to complete the site closure and the actual date of completionof the closure.  If Kaiser-Hill fails tocomplete the closure within the target cost for the project of between $3.6billion and $4.8 billion, Kaiser-Hill’s fee will be reduced to a levelsignificantly less than the fee estimate currently being used to recognizeincome on the project and further reduced by 30% of the costs incurred afterthe target date of March 31, 2007. Kaiser-Hill is also subject to a $20.0 million maximum penalty if theDecember 31, 2007 closure date is not met.

 

Kaiser-Hill has historically incurred expenses that are notreimbursable by the Department of Energy pursuant to the federalregulations.  Accordingly such expenses,which Kaiser-Hill estimates could approximate up to 15% - 20% of the totalaward fee, will be deducted from the total fee prior to any distributions ofnet fees to either us or CH2M Hill Companies, Ltd. For reasons similar to thosedescribed in the following paragraph, it is difficult to estimate either theamount of net fee to be distributed to the owners of Kaiser-Hill and or theeffect, if any, that such unreimbursable costs would have on our future cashflows.  A decrease in our cash flowscould result in a decrease in the value of our common and preferred stock.

 

*There aresubstantial performance risks associated with Kaiser-Hill’s work at the RockyFlats site.  The performance risks mayimpact the timing and cost of closing the site, which in turn could impact ourfee income from Kaiser-Hill.*

 

The clean-up and closure of the Departmentof Energy’s Rocky Flats site involvesubstantial performance risks.  Amongother things, Kaiser-Hill’s activities at the Rocky Flats site involve theclean-up, packaging and transportation of nuclear waste, and the demolition anddestruction of facilities where nuclear weapons components were previouslyproduced.  Some of these activities havenot been previously performed elsewhere, and therefore require the developmentof innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of theRocky Flats site and the activities of Kaiser-Hill and its subcontractors atthe site are such that serious injuries, or even deaths, are possible.  Significant safety incidents at the sitecould stop or significantly impede the progress of work being performed at thesite by Kaiser-Hill and its subcontractors. The Department of Energycontract contemplates that all, or substantially all, of the nuclear waste atRocky Flats will be transported to other sites operated or managed by the Departmentof Energy. The appropriate sites for storage of certain of those nuclear wasteshave not yet been identified.  Inaddition, third-party objections have arisen from time to time with regard tothe transportation to, and storage of nuclear waste at, certain sitespreviously designated by the Department of Energy to receive waste from RockyFlats, including the Department of Energy’s Savannah River site in SouthCarolina.  Deliveries of waste to theSavannah River site were delayed as a result of objections interposed by theGovernor of South Carolina.  Deliveriesto the Savannah River site have begun, but it is possible that similarobjections will be raised with respect to the transportation to, and storage ofwaste from Rocky Flats at, other Department of Energy sites.  Although the Department of Energy contractcontemplates that the Department of Energy is responsible for providingtransportation and storage sites for nuclear waste from Rocky Flats, an ongoinginability to ship plutonium and other nuclear waste to Department of Energysites poses a substantial risk to the timely closure of the Rocky Flats site,and could interfere with Kaiser-Hill’s ability to earn the fees to whichKaiser-Hill believes it should be entitled. This loss of fee income could adversely affect our operating results,which could in turn result in a decrease in the value of our common andpreferred stock.

 

*There arepotential substantial liabilities and costs associated with Kaiser-Hill’sDepartment of Energy contract, which may directly and indirectly impact our feeincome from Kaiser-Hill.*

 

Under the Department of Energy contract,Kaiser-Hill is responsible for, and the Department of Energy will not pay forcosts associated with, liabilities caused by the willful misconduct or lack ofgood faith of Kaiser-Hill’s managerial personnel or the failure to exerciseprudent business judgment by Kaiser-Hill’s managerial personnel. If Kaiser-Hillwere found liable for any

 

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of these reasons, the associated costs could besubstantial, which could have an adverse effect on our operating results. Adecrease in our operations results could cause a decrease in the value of ourcommon and preferred stock.

 

**We facesignificant contingencies, which may adversely impact our ability to meet ourobligations on our preferred stock, to fund our continuing operations and toundertake new operations.**

 

*Our cash flowis partially dependent on the wind-down of the Nova Hut project and theprobability of receiving our payment from Nova Hut is currently uncertain.*

 

Our cash flow is partially dependent on theresolution of disputes relating to Kaiser Netherlands’ performance under its fixed-pricecontract for turnkey engineering and construction services relating to the NovaHut project and on the ability of Nova Hut, which is in financial difficulty,to pay for such services.

 

*We do not havea business plan beyond Kaiser-Hill and the Nova Hut project, and we may or maynot undertake new activities.*

 

Our long-term future profitability will bedependent, to a significant extent, on our ability to develop a business planfor ongoing operations. Until our Board of Directors develops our businessplan, we are unable to determine either the amount of risk that futureoperations will involve or whether we have the ability to realize long-termprofitability. It is possible that our ongoing business plan will be limited toresolving issues related to the Nova Hut project and participating in theactivities of Kaiser-Hill.  However, ourBoard of Directors is considering whether we should attempt to develop a newrevenue base.  Such efforts could, forexample, attempt to take advantage of our successful history of performing inthe government services market, both independently and throughKaiser-Hill.  Our efforts to develop arevenue base separate from Kaiser-Hill may involve start-up activities withrisks peculiar to activities of this type, which may adversely impact our cashflow and operating results. A decrease in our cash flows and operatingresults could result in a decrease in the value of our common and preferredstock.

 

*We may beunable to obtain performance guarantees, which may limit our ability toundertake new activities.*

 

Given the reorganization history of Kaiser GroupHoldings, Inc., we may not be able to obtain satisfactory contract performanceguaranty mechanisms, such as performance bonds and letters of credit, at all oron satisfactory terms, to the extent such mechanisms are needed for newprojects.  These factors could limit thenature of the business activities in which we could engage should we decide toattempt to develop a new revenue base apart from Kaiser-Hill, which may adverselyimpact our cash flow and operating results and result in a decrease inthe value of our common and preferred stock.

 

*We may beunable to generate funds to meet our obligations and we may be unable to accessadditional capital.*

 

We may be unable to continue to generatesufficient funds to meet our obligations, notwithstanding the significantimprovements in our operations and financial condition.  Although we believe that we will be able togenerate sufficient funds to meet our working capital needs for the foreseeablefuture, our ability to gain access to additional capital, if needed, is notcertain. Due to reorganization history of Kaiser Group Holdings, Inc. andcurrent financial markets, it is difficult to predict whether additionalcapital would be available to us in the event that we were unable to generalfunds to meet our obligations.  Ourinability to gain access to additional capital may also limit our ability toundertake new activities.  Ultimately,our inability to meet our existing obligations or to undertake new activitiescould adversely impact our cash flow and operating results.  A decrease in our cash flows andoperating results could result in a decrease in the value of our common andpreferred stock.

 

*In the event of a change of control,we may not have the financial resources to redeem preferred stock.*

 

Our preferred stock is redeemable at the option of the holder upon achange of control as defined in the terms of the preferred stock.  We are not presently aware of any eventsthat would cause a change of control. However, based on a Report on Form 4 dated February 12, 2003, which wasfiled with the Securities and Exchange Commission by Tennenbaum & Co., LLCon February 13, 2003, we believe that Tennenbaum & Co., LLC and Michael E. Tennenbaumtogether own approximately 47.2% of our common stock.  The terms of our preferred stock provide that a change of controloccurs when, among other things, a person or “group” (within the meaning ofSection 13(d)(3) of the Securities Exchange Act of 1934) directly or indirectlyacquires “beneficial ownership” (as defined in Rule 13d-3 under the SecuritiesExchange Act of 1934) of more than 50% of all classes of our common equity(defined in the terms of our preferred stock as capital stock entitled to votein the election of directors).

 

20

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In the event that we are required to redeem preferred stock due to achange of control, we may not have available capital to redeem the stock.  Ourability to gain access to additional capital from outside sources, if needed,is not certain.  The inability to gainaccess to additional capital may limit our ability to meet the redemptionobligations with respect to the preferred stock.

 

**Item 7A.****    Quantitative and Qualitative Informationabout Market Risk**

 

We do not believe we have significant exposuresto market risk as we do not presently have any debt.  The interest rate risk associated with our obligation to fund acapped retiree medical obligation is not sensitive to interest rate risk otherthan through the determination of the present value of its remaining obligationthereunder.  A 10% increase or decreasein the average annual prime rate would result in a decrease in the carryingvalue of the plan obligation but would not change the actual cost of the plan.

 

**Item 8****.       Financial Statements and SupplementaryData**

 

The Financial Statements and Supplementary Dataappear on pages F-1 through F-32 and S-1 through S-2 hereto.

 

**Item 9.****       Changes in and Disagreements with Accountantson Accounting and Financial Disclosures**

 

None.

 

**PART III**

 

**Items 10****, 11, 12 and 13.**

 

Information required by Part III (Items 10, 11, 12 and 13) of thisAnnual Report on Form 10-K is incorporated by reference from our definitiveProxy Statement for our Annual Meeting of Shareholders to be held on May 7,2003, which will be filed with the Securities and Exchange Commission, pursuantto Regulation 14A, not later than 120 days after the end of the fiscal year,except that the information required by Item 10 with respect to executiveofficers of the Company is included in Item 4A of Part I of this Annual Reporton Form 10-K.

 

**Item 14****.     Controls and Procedures**

 

Based upon an evaluation by our Chief Executive Officer and ChiefFinancial Officer within 90 days prior to the filing date of this Annual Reporton Form 10-K, they have concluded that our disclosure controls and procedures,as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Securities ExchangeAct of 1934, as amended, are effective and ensure that all material informationrequired to be filed in this Annual Report on Form 10-K has been made known tothem in a timely fashion.

 

There were no significant changes in our internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of the evaluation referred to above.

 

21

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**PART IV**

 

**Item 15****.     Exhibits, Financial Statement Schedules andReports on Form 8-K**

 

**(a)     Documentsfiled as part of this Report**

 

**1.      FinancialStatements**

 

Consolidated Financial Statements of Kaiser GroupHoldings, Inc. and Subsidiaries

 
| a. |   | Report of Independent Accountants                                                                                                                     |
|----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| b. |   | Consolidated Balance Sheets as of  December 31, 2002 and December 31, 2001                                                                            |
| c. |   | Consolidated Statements of Operations for  the years ended December 31, 2002, 2001 and 2000                                                           |
| d. |   | Consolidated Statements of Shareholders’  Equity (Deficit) and Comprehensive Income (Loss) for the years ended December  31, 2002, 2001 and 2000 |
| e. |   | Consolidated Statements of Cash Flows for  the years ended December 31, 2002, 2001 and 2000                                                           |
| f. |   | Notes to Consolidated Financial Statements.                                                                                                           |

 

**2.      FinancialStatement Schedules**

 

Supplemental Schedule Relating to theConsolidated Financial Statements of Kaiser Group Holdings Inc. andSubsidiaries for the years ended December 31, 2002, 2001 and 2000.

 
| a.     |   | Financial Statements of Kaiser-Hill  Company LLC as of December 31, 2002and  2001 and for the three years ended December 31, 2000. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                               |
| b.     |   | (i)                                                                                                                                | Report of Independent  Accountants |
|   |   | (ii)                                                                                                                               | Schedule II: Valuation and Qualifying  Accounts |

 

All Schedules except the ones listed above havebeen omitted because they are not applicable or not required or because therequired information is included elsewhere in the financial statements in thisfiling.

 

**3.      Exhibits(listed according to the number assigned in the table in Item 601 of RegulationS-K).**

 

**Exhibit No. 2–Plan of Acquisition, reorganization,arrangement, liquidation or succession**

 

2(a) Second Amended Plan of Reorganization(Incorporated by reference to Exhibit 2 to Current Report on Form 8-K (Registrant No. 1-12248) filed with theCommission on December 14, 2000)

 

**Exhibit No. 3–Articles of Incorporation and By-laws of theRegistrant**

 

3(a)  Certificate ofIncorporation of Kaiser Group Holdings, Inc. (Incorporated by reference toExhibit 3(i) to Current Report on Form 8-K (Registrant No. 1-12248) filed withthe Commission on December 14, 2000)

 

3(b)  By-laws of Kaiser GroupHoldings, Inc. (Incorporated by reference to Exhibit 3(ii) to Current Report onForm 8-K (Registrant No. 1-12248) filed with the Commission on December 14,2000)

 

**Exhibit No. 4–Instruments Defining the Rights of SecurityHolders, including Indentures**

 

4(a)  Formof Put Agreement relating to preferred stock of Kaiser Group Holdings, Inc.(Incorporated by reference to Exhibit 4 to Current Report on Form 8-K(Registrant No. 1-12248) filed with the Commission on December 14, 2000)

 

22

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**Exhibit No. 10 – Material Contracts**

 

10(a)   Kaiser Group International, Inc. Employee Stock Ownership Plan (asamended and restated as of January 1, 1996). (Incorporated by reference to Exhibit No. 10(b) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

1.  Amendment No. 1 with the effective date of January 1, 1998  (Incorporated by reference to ExhibitNo. 10(b)(1) to Annual Report on Form 10-K (Registrant No. 1-12248) filedwith the Commission on April 17, 2000)

 

2.  AmendmentNo. 2 with the effective date of January 1, 1996  (Incorporated by reference toExhibit No. 10(b)(2) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the Commission on April 17, 2000)

 

3.  Amendment No. 3 dated April 19, 1999.  (Incorporated by reference to Exhibit No. 10(b)(3) to Annual Reporton Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17,2000)

 

4.  Amendment No. 4 dated June 25, 1999. (Incorporated by referenceto Exhibit No. 10(b)(4) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

10(b) Trust Agreement with Vanguard FiduciaryTrust Company dated as of August 31, 1995, for ICF Kaiser International, Inc.Employee Stock Ownership Plan (Incorporated by reference to Exhibit No. 10(c)to Registration Statement on Form S-1 (Registrant No. 33-64655) filed with theCommission on November 30, 1995)

 

10(c) ICF Kaiser International, Inc. Retirement Plan (as amended andrestated as of March 1, 1993) (and further amended with respect to name changeonly as of June 26, 1993) (Incorporated by reference to Exhibit No. 10(d) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarterof fiscal 1994 filed with the Commission on October 15, 1993)

 

1.  AmendmentNo. 1 dated April 24, 1995 (Incorporated by reference to Exhibit No. 10(d)(1)to Annual Report on Form 10-K (Registrant No. 1- 12248) filed with theCommission on May 23, 1995)

 

2.  Amendment No. 2 dated December 15, 1995 (Incorporated byreference to Exhibit No. 10(d)(2) to Transition Report on Form 10-K (RegistrantNo. 1-12248) for the transition period from March 1, 1995 to December 31, 1995filed with the Commission on March 29, 1996)

 

3.  AmendmentNo. 3 dated December 13, 1996 (Incorporated by reference to Exhibit No.10(d)(3) to Registration Statement on Form S-1 (Registrant No. 333-19519) filedwith the Commission on January 10, 1997)

 

4.  Amendment No. 4 dated April 19, 1999 (Incorporated by referenceto Exhibit No. 10(d)(4) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

5.  Amendment No. 5 dated June 25, 1999 (Incorporated by reference toExhibit No. 10(d)(5) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

6.  Amendment No. 6 dated August 30, 1999 (Incorporated by referenceto Exhibit No. 10(d)(6) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

7.  AmendmentNo. 7 dated April 13, 2000 (Incorporated by reference to Exhibit 10(d)(7) onForm 8-K (Registrant No. 1-12248) filed with the Commission on May 2, 2000)

 

8.  AmendmentNo. 8 dated June 8, 2000 (Incorporated by reference to Exhibit 10(d)(8) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarterof fiscal 2000 filed with the Commission on September 6, 2000)

 

10(d) Trust Agreement with Vanguard FiduciaryTrust Company dated as of August 31, 1995, for ICF Kaiser International, Inc.Retirement Plan (Incorporated by reference to Exhibit No. 10(e) to RegistrationStatement on Form S-1 (Registrant No. 33-64655) filed with the Commission onNovember 30, 1995)

 

10(e)   ICF Kaiser International, Inc. Section 401(k) Plan (as amended andrestated as of March 1, 1993) (and further amended with respect to name changeonly as of June 26, 1993) (Incorporated by reference to Exhibit No. 10(f) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarterof fiscal 1994 filed with the Commission on October 15, 1993)

 

23

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1.  Amendment No. 1 dated April 24, 1995 (Incorporated by referenceto Exhibit No. 10(p)(1) to Annual Report on Form 10-K (Registrant No. 1-12248)for fiscal 1995 filed with the Commission on May 23, 1995)

 

2.  AmendmentNo. 2 dated December 15, 1995 (Incorporated by reference to Exhibit No.10(p)(2) to Transition Report on Form 10-K (Registrant No. 1-12248) for thetransition period from March 1, 1995 to December 31, 1995 filed with theCommission on March 29, 1996)

 

3.  Amendment No. 3 dated December 13, 1996 (Incorporated byreference to Exhibit No. 10(q)(3) to Registration Statement on Form S-1(Registrant No. 333-19519) filed with the Commission on January 10, 1997)

 

4.  Amendment No. 4 dated April 8, 1999 (Incorporated by reference toExhibit No. 10(k)(4) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

5.  Amendment No. 5 dated June 25, 1999 (Incorporated by reference toExhibit No. 10(k)(5) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

6.  AmendmentNo. 6 dated April 13, 2000 (Incorporated by reference to Exhibit 10(k)(6) onForm 8-K (Registrant No. 1-12248) filed with the Commission on May 2, 2000)

 

7.  Amendmentdated January 1, 2001 (Incorporated by reference to Exhibit No. 10(m)(7) toAnnual Report on Form 10-K (Registrant No. 1-2248) filed with the Commission onMarch 30, 2001)

 

10(f) Trust Agreement with Vanguard Fiduciary Trust Company dated as of March1, 1989, for the ICF Kaiser International, Inc. Section 401(k) Plan(Incorporated by reference to Exhibit No. 28(b) to Registration Statement onForm S-8 (Registrant No. 33-51460) filed with the Commission on August 31,1992)

 

10(g)  Asset Purchase Agreementbetween The IT Group, Inc. and ICF Kaiser International, Inc. dated March 9,1999 (Incorporated by reference to Exhibit C to Registration Statement on Form8-K (Registrant No. 1- 12248) filed with the Commission on April 23, 1999)

 

10(h) Contract between Kaiser-Hill Company, LLC,a subsidiary of the Corporation, and the U.S. Department of Energy datedJanuary 24, 2000 (Incorporated by reference to Exhibit No. 10(o) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the Commission on April17, 2000)

 

10(i) Master Transaction Agreement between Tyco Group S.a.r.l. and KaiserGroup International, Inc. dated June 9, 2000 (Incorporated by referenceto Exhibit 10(p) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) forthe second quarter of fiscal 2000 filed with the Commission on September 6,2000)

 

1.  AmendmentNo. 1 to the Master Transaction Agreement betweenTyco Group S.a.r.l. and Kaiser Group International, Inc. dated June 9, 2000 (Incorporatedby reference to Exhibit 10(p)(1) to Quarterly Report on Form 10-Q (RegistrantNo. 1-12248) for the second quarter of fiscal 2000 filed with the Commission onSeptember 6, 2000)

 

10(j) Master Transaction Agreement between Hatch Associates, Inc. and KaiserGroup International, Inc. dated July 6, 2000 (Incorporated by referenceto Exhibit 10(q) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) forthe second quarter of fiscal 2000 filed with the Commission on September 6,2000)

 

10(k)  Assignment of MembershipInterest in Hunters Branch Leasing, LLC by and between Kaiser HoldingsUnlimited, Inc. (Assignor) and NutleyPartners, LC (Assignee), dated January 1, 2001 (Incorporated byreference to Exhibit No. 10(r) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the Commission on April 2, 2001)

 

**Exhibit No. 10 – Material Contracts (management contracts,compensatory plans, or arrangements.)**

 

10(l)  Kaiser Group Holdings, Inc. 2002 Equity Compensation Plan(Incorporated by reference to Exhibit No. 10(n) to Registration Statement onForm S-4 (Registrant No. 333-100640) filed with the Commission on October 18,2002)

 

10(m)  Amended and Restated Employment Agreement with John T. Grigsby,Jr., President and Chief Executive Officer, effective as of December 19, 2000(Incorporated by reference to Exhibit No. 10(m) to Registration Statement onForm S-4 (Registrant No. 333-100640) filed with the Commission on October 18,2002)

 

24

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**Exhibit No. 21 – Consolidated Subsidiaries of the Registrantas of March 1, 2003**

 

**Exhibit No. 99.1 – Certification of the Chief ExecutiveOfficer**

Pursuant to 18 U.S.C.Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of2002

 

**Exhibit No. 99.2 – Certification of the Chief FinancialOfficer**

Pursuant to 18 U.S.C.Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of2002

 

**(b) Reports on Form 8-K**

 

On November 15, 2002, the Company filed a CurrentReport on Form 8-K.  Pursuant to Item 5of such Report, the Company announced plans for a preferred stock redemption ofits Series 1 Redeemable Cumulative Preferred Stock.  Also announced was the election of Mr. Frank E. Williams, Jr. asa fourth member of its Board of Directors.

 

On November 27, 2002, the Company filed a CurrentReport on Form 8-K.  Pursuant to Item 5of such Report, the Company announced a delay in the completion of its plannedredemption of Series 1 Redeemable Cumulative Preferred Stock.

 

On December 11, 2002, the Company filed a CurrentReport on Form 8-K.  Pursuant to Item 5of such Report, the Company reported that it has decided to withdraw itsproposed exchange offer of notes for preferred stock and proceed with aredemption of $15,519,020 liquidation preference of its Series 1 RedeemableCumulative Preferred Stock to take place on or about January 31, 2003.

 

25

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis Annual Report on Form 10-K to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   | KAISER GROUP HOLDINGS, INC.                         |
|--------|-----------------------------------------------------|
|   |                                                |
|   |                                                |
|   | By:                                                 | /s/ John T. Grigsby, Jr. |   |
|   | Name:  John  T. Grigsby, Jr.                   |
|   | Title:   President and Chief Executive Officer |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.

 

 
| (1)  Principal executive officer           |                       |   |                                                                                   |
|-------------------------------------------------|----------------------------|--------|----------------------------------------------------------------------------------------|
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            | /s/ John T. Grigsby, Jr.   |   |                                                                                   | March 31, 2003 |
|                                            | John T. Grigsby, Jr.       |   | President  and Chief Executive Officer                                                 |   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
| (2) Principal financial and  accounting officer |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            | /s/ Marijo L. Ahlgrimm     |   |                                                                                   | March 31, 2003 |
|                                            | Marijo L. Ahlgrimm         |   | Executive Vice President,  Chief Financial Officer,  Secretary and Assistant Treasurer |   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
| (3)  Board of Directors                    |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            | /s/ Jon B. Bennett         |   |                                                                                   | March 31, 2003 |
|                                            | Jon B. Bennett             |   | Director                                                                               |   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            | /s/ John T. Grigsby, Jr.   |   |                                                                                   | March 31, 2003 |
|                                            | John T. Grigsby, Jr.       |   | Director                                                                               |   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            | /s/ James J. Maiwurm       |   |                                                                                   | March 31, 2003 |
|                                            | James J. Maiwurm           |   | Director                                                                               |   |
|                                            |                       |   |                                                                                   |
|                                            |                       |   |                                                                                   |
|                                            | /s/ Frank E. Williams, Jr. |   |                                                                                   | March 31, 2003 |
|                                            | Frank E. Williams, Jr.     |   | Director                                                                               |   |

 

26

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**CERTIFICATION**

 

I, John T. Grigsby, Jr., Chief Executive Officer ofthe registrant, certify that:

 

1)   I have reviewed this Annual Report on Form 10-K of Kaiser GroupHoldings, Inc.;

 

2)         Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3)         Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4)         The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                   designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)                  evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                   presented inthis annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5)         The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)                   all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6)         The registrant’s othercertifying officer and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| March 31, 2003 | /s/ John T. Grigsby, Jr.              |   |
|----------------|---------------------------------------|--------|
|           | John T. Grigsby, Jr.,                 |
|           | President and Chief Executive Officer |

 

**CERTIF****ICATION**

 

I, Marijo L. Ahlgrimm, Chief Financial Officer of theregistrant, certify that:

 

1)         I have reviewed thisAnnual Report on Form 10-K of Kaiser Group Holdings, Inc.;

 

2)         Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

27

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3)         Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4)         The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                   designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)                  evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                   presented inthis annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5)         The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)                   all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6)         The registrant’s othercertifying officer and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| March 31, 2003 | /s/ Marijo L. Ahlgrimm                                |   |
|----------------|-------------------------------------------------------|--------|
|           | Marijo L. Ahlgrimm,                                   |
|           | Executive Vice President and  Chief Financial Officer |
|           |

 

28

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# **REPORT OF** INDEPENDENTACCOUNTANTS

 

 

To Board of Directors and

  Shareholders of Kaiser GroupHoldings, Inc.

 

 

In our opinion, the consolidated financial statements listed in theaccompanying index present fairly, in all material respects, the financialposition of Kaiser Group Holdings, Inc. and Subsidiaries at December 31, 2002and December 31, 2001, and the results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2002, inconformity with accounting principles generally accepted in the United Statesof America.  These financial statementsare the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Asdiscussed in Note 1 to the consolidated financial statements, on December 5,2000, the United States Bankruptcy Court for the District of Delaware confirmedthe Company’s Plan of Reorganization (the Plan).  The Plan became effective on December 18, 2000 and the Companyemerged from Chapter 11.  In connectionwith its emergence from Chapter 11, the Company adopted Fresh-Start Reportingas of December 18, 2000 as further described in Note 2 to the consolidatedfinancial statements.  At this timethere remain significant uncertainties related to the ultimate amount of claimsthat will be allowed pursuant to the Company’s bankruptcy proceedings.

 

 

PricewaterhouseCoopers LLP

 

 

McLean, Virginia

March 27, 2003

 

F-1

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**KAISER GROUPHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                |   | **December  31,**                         |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                                                                                                                |   | **2002**                                  |       | **2001** |   |
|                                                                                                                                                                                |   | **(In  thousands, except share amounts)** |       |
|                                                                                                                                                                                |   | **SUCCESSOR**                             |       |
| **ASSETS**                                                                                                                                                                          |   |                                      |       |   |   |
| Current Assets                                                                                                                                                                      |   |                                      |       |   |   |
| Cash and cash  equivalents                                                                                                                                                          |   | 17,413                                    |       | 8,848 |   |
| Restricted cash  and cash equivalents                                                                                                                                               |   | 18,679                                    |       | 15,844 |   |
| Marketable  securities available for sale                                                                                                                                           |   | —                                    |       | 6,489 |   |
| Prepaid expenses  and other current assets                                                                                                                                          |   | 2,404                                     |       | 1,843 |   |
| Net assets of  discontinued operations                                                                                                                                              |   | 6,000                                     |       | 6,000 |   |
| Total Current  Assets                                                                                                                                                               |   | 44,496                                    |       | 39,024 |   |
|                                                                                                                                                                                |   |                                      |       |   |   |
| Other Assets                                                                                                                                                                        |   |                                      |       |   |   |
| Investments in  and advances to affiliates                                                                                                                                          |   | 45,663                                    |       | 29,229 |   |
| Notes receivable                                                                                                                                                                    |   | 5,894                                     |       | 6,550 |   |
| Deferred tax  assets                                                                                                                                                                |   | —                                    |       | 5,785 |   |
| Other long-term  assets                                                                                                                                                             |   | 142                                       |       | 303 |   |
|                                                                                                                                                                                |   | 51,699                                    |       | 41,867 |   |
| Total Assets                                                                                                                                                                        |   | $                                         | 96,195     |   | $ | 80,891 |   |
|                                                                                                                                                                                |   |                                      |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |   |                                      | ** ** |   | ** ** |
|                                                                                                                                                                                |   |                                      |       |   |   |
| Current  Liabilities                                                                                                                                                                |   |                                      |       |   |   |
| Accounts payable                                                                                                                                                                    |   | $                                         | 922        |   | $ | 730 |   |
| Post retirement  benefit plan obligations                                                                                                                                           |   | 7,193                                     |       | 7,473 |   |
| Other accrued  expenses                                                                                                                                                             |   | 6,501                                     |       | 4,776 |   |
| Preferred stock  dividend payable                                                                                                                                                   |   | 654                                       |       | 731 |   |
| Deferred tax  liability                                                                                                                                                             |   | 6,538                                     |       | — |   |
| Income taxes  payable                                                                                                                                                               |   | 640                                       |       | 1,340 |   |
| Total Current  Liabilities                                                                                                                                                          |   | 22,448                                    |       | 15,050 |   |
|                                                                                                                                                                                |   |                                      |       |   |   |
| Commitments and  Contingencies                                                                                                                                                      |   |                                      |       |   |   |
|                                                                                                                                                                                |   |                                      |       |   |   |
| Preferred stock  (subject to certain mandatory redemption provisions),   par value $.01 per share:.                                                                                 |   |                                      |       |   |   |
| Authorized—2,000,000  shares                                                                                                                                                   |   |                                      |       |   |   |
| Issued and  outstanding— 1,017,120 and 1,136,024 shares in 2002 and 2001, respectively,  net of 119,587 treasury shares in 2002; stated at liquidation value of $55  per share |   | 55,942                                    |       | 62,481 |   |
| New Common  stock, par value $.01 per share:                                                                                                                                        |   |                                      |       |   |   |
| Authorized—3,000,000  shares                                                                                                                                                   |   |                                      |       |   |   |
| Issued and  outstanding-1,590,062 and 1,585,239 shares in 2002 and 2001, respectively                                                                                               |   | 16                                        |       | 16 |   |
| Capital in  excess of par                                                                                                                                                           |   | 8,606                                     |       | 7,947 |   |
| Retained  earnings (accumulated deficit)                                                                                                                                            |   | 9,215                                     |       | (4,957 | ) |
| Accumulated  other comprehensive income (loss)                                                                                                                                      |   | (32                                       | )          | 354 |   |
| Total  Shareholders’ Equity                                                                                                                                                    |   | 17,805                                    |       | 3,360 |   |
| Total  Liabilities and Shareholders’ Equity                                                                                                                                    |   | $                                         | 96,195     |   | $ | 80,891 |   |

 

See notes to consolidated financial statements

 

F-2

----

 

**KAISER GROUPHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                                                                           |   | **Year Ended  December 31,**                  |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                           |   | **Successor****Company**                      |   | **Predecessor  Company** |   |   |
|                                                                                                                           |   | **2002**                                      |   | **2001** |   | **2000** |   |   |
|                                                                                                                           |   | **(In  thousands, except per share amounts)** |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Gross Revenue                                                                                                                  |   | —                                        |   | — |   | $ | 271,385 |   |   |
| Subcontract and  direct material costs                                                                                         |   | —                                        |   | — |   | (195,367 | ) |   |
| Service Revenue                                                                                                                |   | —                                        |   | — |   | 76,018 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Operating  Expenses                                                                                                            |   |                                          |   |   |   |   |   |   |
| Direct labor and  fringe benefits                                                                                              |   | —                                        |   | — |   | 64,197 |   |   |
| Administrative  expenses                                                                                                       |   | 7,028                                         |   | 9,692 |   | 8,435 |   |   |
| Depreciation and  amortization.                                                                                                |   | —                                        |   | — |   | 1,695 |   |   |
| Impairment  charge                                                                                                             |   | —                                        |   | 1,100 |   | — |   |   |
| Restructuring  charges                                                                                                         |   | —                                        |   | — |   | 1,915 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Operating Income  (Loss)                                                                                                       |   | (7,028                                        | )      | (10,792 | ) | (224 | ) |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Other Income  (Expense)                                                                                                        |   |                                          |   |   |   |   |   |   |
| Equity income in  earnings of affiliate, net of amortization of $3,524 for both the years ended  December 31, 2002 and 2001    |   | 33,233                                        |   | 11,518 |   | 4,218 |   |   |
| Gain on stock  demutualization                                                                                                 |   | —                                        |   | 5,856 |   | — |   |   |
| Gain on sale of  investment                                                                                                    |   | 3,371                                         |   | — |   | — |   |   |
| Gain on sale of  security                                                                                                      |   | 106                                           |   | — |   | — |   |   |
| Write-off of  notes receivable and accrued interest                                                                            |   | (1,320                                        | )      | — |   | — |   |   |
| Interest income                                                                                                                |   | 803                                           |   | 1,075 |   | 2,024 |   |   |
| Interest expense                                                                                                               |   | —                                        |   | — |   | (7,754 | ) |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Income (Loss)  From Continuing Operations Before Reorganization Items, Income Tax, Minority  Interest, and Extraordinary Items |   | 29,165                                        |   | 7,657 |   | (1,736 | ) |   |
| Reorganization  items                                                                                                          |   | —                                        |   | — |   | 8,611 |   |   |
| Income (Loss)  From Continuing Operations Before Income Tax, Minority Interest, and  Extraordinary Items                       |   | 29,165                                        |   | 7,657 |   | 6,875 |   |   |
| Income tax  (expense) benefits                                                                                                 |   | (11,319                                       | )      | (2,417 | ) | 39,521 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Income (Loss)  From Continuing Operations Before Minority Interest and Extraordinary Items                                     |   | 17,846                                        |   | 5,240 |   | 46,396 |   |   |
| Minority  interest in net income of affiliated company                                                                         |   | —                                        |   | — |   | (5,999 | ) |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Income (Loss)  From Continuing Operations Before Extraordinary Items                                                           |   | 17,846                                        |   | 5,240 |   | 40,397 |   |   |
| Income  (Loss) from discontinued operations, net  of tax                                                                  |   | 497                                           |   | (10,197 | ) | (2,966 | ) |   |
| (Loss) on sales  of discontinued operations, net of tax                                                                        |   | —                                        |   | — |   | (7,669 | ) |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Income (loss)  Before Extraordinary Items                                                                                      |   | 18,343                                        |   | (4,957 | ) | 29,762 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Extraordinary  items, net of tax                                                                                               |   | —                                        |   | — |   | 124,542 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Net Income  (Loss)                                                                                                             |   | 18,343                                        |   | (4,957 | ) | 154,304 |   |   |
| Preferred stock  dividends.                                                                                                    |   | (4,171                                        | )      | (3,091 | ) | — |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Income (Loss)  Applicable to Common Shareholders                                                                               |   | $                                             | 14,172 |   | $ | (8,048 | ) | $ | 154,304 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Basic and  Diluted Earnings (Loss) Per Common Share:                                                                           |   |                                          |   |   |   |   |   |   |
| Continuing  operations, net of tax                                                                                             |   | $                                             | 8.60   |   | $ | 1.92 |   | $ | 1.74 |   |   |
| Discontinued  operations, net of tax                                                                                           |   | 0.31                                          |   | (9.11 | ) | (0.46 | ) |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Earnings (Loss)  Before Extraordinary Items                                                                                    |   | $                                             | 8.91   |   | $ | (7.19 | ) | 1.28 |   |   |
| Extraordinary  Items                                                                                                           |   | —                                        |   | — |   | 5.35 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Net Earnings  (Loss) Per Share                                                                                                 |   | $                                             | 8.91   |   | $ | (7.19 | ) | $ | 6.63 |   |   |
|                                                                                                                           |   |                                          |   |   |   |   |   |   |
| Weighted average  shares for basic and diluted earnings (loss) per common share                                                |   | 1,590                                         |   | 1,119 |   | 23,255 |   |   |
|                                                                                                                                |        |                                               |        |  |  |  |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

F-3

----

 

**KAISER GROUPHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’EQUITY (DEFICIT)**

(In thousands, except share amounts)

 
|                                                                         |   | **Old Common Stock** |   | **New Common Stock** |   | **Capital In  Excess of Par** |      | **Accumulated  Earnings  (Deficit)** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   |
|------------------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|-------------------------------|-----------|--------------------------------------|--------|------------------------------------------------------|--------|
| **Shares**                                                                   |   | **Par  Value**       |   | **Shares**           |   | **Par Value**                 |      |
| Predecessor Company                                                          |   |                 |   |                 |   |                          |      |                                 |   |                                                 |   |   |   |   |   |
| Balance, December 31, 1999                                                   |   | 23,655,500           |   | 237                  |   | —                        |      | —                               |   | 73,643                                               |   | (140,681 | ) | (3,102 | ) |
| Net income                                                                   |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | 154,304 |   | — |   |
| Reacquisition of common stock                                                |   | (241,172             | )      | (3                   | )      | —                        |      | —                               |   | —                                               |   | — |   | — |   |
| Reclassification for losses on  foreign currency translation adjustment |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | — |   | 3,102 |   |
| Effect of fresh-start reporting:  Elimination of accumulated  Earnings       |   | —               |   | —               |   | —                        |      | —                               |   | 13,623                                               |   | (13,623 | ) | — |   |
|                                                                         |   |                 |   |                 |   |                          |      |                                 |   |                                                 |   |   |   |   |   |
| Successor Company  Balance, December 31, 2000                                |   | 23,414,328           |   | 234                  |   | —                        |      | —                               |   | 87,266                                               |   | — |   | — |   |
| Net loss                                                                     |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | (4,957 | ) | — |   |
| Issuances of new common stock                                                |   | —               |   | —               |   | 1,610,889                     |      | 16                                   |   | (16                                                  | )      | — |   | — |   |
| Cancellation of old common  Stock                                            |   | (23,414,328          | )      | (234                 | )      | —                        |      | —                               |   | 234                                                  |   | — |   | — |   |
| Issuance of preferred stock                                                  |   | —               |   | —               |   | —                        |      | —                               |   | (62,481                                              | )      | — |   | — |   |
| Foreign currency translation  Adjustment                                     |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | — |   | (39 | ) |
| Unrealized gain on securities  Available for sale                            |   |                 |   |                 |   |                          |      |                                 |   |                                                 |   |   |   | 393 |   |
| Preferred stock dividends                                                    |   | —               |   | —               |   | —                        |      | —                               |   | (3,091                                               | )      | — |   | — |   |
| Cash buy back of new common  Stock                                           |   | —               |   | —               |   | (25,650                       | )         | —                               |   | (125                                                 | )      | — |   | — |   |
| Class 4 allowed claim settlements                                            |   | —               |   | —               |   | —                        |      | —                               |   | (13,840                                              | )      | — |   | — |   |
| Balance, December 31, 2001                                                   |   | —               |   | $                    | — |                          | 1,585,239 |                                 | $      | 16                                                   |   | $ | 7,947 |   | $ | (4,957 | ) | $ | 354 |   |
| Net income                                                                   |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | 18,343 |   | — |   |
| Issuances of new common stock                                                |   | —               |   | —               |   | 4,823                         |      |                                 |   | 10                                                   |   | — |   | — |   |
| Issuance of preferred stock in  settlement of allowed class 4  claims        |   | —               |   | —               |   | —                        |      | —                               |   | (38                                                  | )      | — |   | — |   |
| Foreign currency translation  Adjustment                                     |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | — |   | 7 |   |
| Unrealized gain on securities  Available for sale                            |   |                 |   |                 |   |                          |      |                                 |   |                                                 |   |   |   | (393 | ) |
| Preferred stock dividends                                                    |   | —               |   | —               |   | —                        |      | —                               |   | —                                               |   | (4,171 | ) | — |   |
| Purchase of preferred treasury stock below liquidation  value                |   |                 |   |                 |   |                          |      |                                 |   | 2,594                                                |   |   |   |   |   |
| Class 4 allowed claim settlements                                            |   |                 |   |                 |   |                          |      |                                 |   | (291                                                 | )      |   |   |   |   |
| Tax adjustment                                                               |   | —               |   | —               |   | —                        |      | —                               |   | (1,616                                               | )      | — |   | — |   |
|                                                                         |   |                 |   |                 |   |                          |      |                                 |   |                                                 |   |   |   |   |   |
| Balance, December 31, 2002                                                   |   | —               |   | $                    | — |                          | 1,590,062 |                                 | $      | 16                                                   |   | $ | 8,606 |   | $ | 9,215 |   | $ | (32 | ) |

 

**KAISER GROUPHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
|                                                                                |   | **Year Ended December 31,** |       |
|-------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                |   | **Successor Company**       | ** ** | **Predecessor  Company** | ** ** |
|                                                                                |   | **2002**                    |       | **2001** |   | **2000** |   |
|                                                                                |   |                        |       |   |   |   |   |
| Net Income (Loss).                                                                  |   | $                           | 18,343     |   | $ | (4,957 | ) | $ | 154,304 |   |
| Other Comprehensive Income (Loss)                                                   |   |                        |       |   |   |   |   |
| Foreign currency translation adjustments                                            |   | 7                           |       | (39 | ) | — |   |
| Unrealized gain on securities, net of tax                                           |   | (393                        | )          | 393 |   | — |   |
| Reclassification for losses on foreign currency  translation included in net income |   | —                      |       | — |   | 3,102 |   |
|                                                                                |   |                        |       |   |   |   |   |
| Total Comprehensive Income (Loss)                                                   |   | $                           | 17,957     |   | $ | (4,603 | ) | $ | 157,406 |   |

 

Seenotes to consolidated financial statements.

 

F-4

----

 

##### **KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                               |   | **For the  year ended December 31,**      |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                               |   | ***Successor  Company***                  |   | ***Predecessor Company*** |   |
|                                                                                                               |   | **2002**                                  |   | **2001** |   | **2000** |   |
|                                                                                                               |   | **(in  thousands, except share amounts)** |   |
| Operating  Activities                                                                                              |   |                                      |   |   |   |   |   |
| Net income  (loss)                                                                                                 |   | $                                         | 18,343 |   | $ | (4,957 | ) | $ | 154,304 |   |
| Adjustments to  reconcile net income (loss) to net cash  Used in operating activities:                             |   |                                      |   |   |   |   |   |
| (Gain) loss on  sale of discontinued operations                                                                    |   | —                                    |   | — |   | 7,669 |   |
| Loss of  discontinued operations, net of tax                                                                       |   | 259                                       |   | 10,197 |   | 2,966 |   |
| Gain on sale of  investments                                                                                       |   | (3,371                                    | )      |   |   |   |   |
| Income tax  benefit                                                                                                |   | —                                    |   | — |   | (39,521 | ) |
| Reorganization  items                                                                                              |   | —                                    |   | — |   | (8,611 | ) |
| Deferred taxes  related to continuing operating activities                                                         |   | 10,746                                    |   | 1,312 |   | — |   |
| Gain on stock  demutualization                                                                                     |   | —                                    |   | (5,856 | ) | — |   |
| Impairment  charge                                                                                                 |   | —                                    |   | 1,100 |   | — |   |
| Gain on sale of  stock                                                                                             |   | (106                                      | )      | — |   |   |   |
| Extraordinary  items                                                                                               |   | —                                    |   | — |   | (124,542 | ) |
| Equity in  unconsolidated affiliate                                                                                |   | (33,233                                   | )      | (11,518 | ) |   |   |
| Note receivable  write-off                                                                                         |   | —                                    |   | — |   | — |   |
| Cash  distributions in excess of (less than) earnings from consolidated Affiliate  companies                       |   | —                                    |   | — |   | 5,333 |   |
| Depreciation and  amortization                                                                                     |   | —                                    |   | — |   | 1,695 |   |
| Minority  interest in net income of affiliate.                                                                     |   | —                                    |   | — |   | 5,999 |   |
| Changes in  operating assets and liabilities, net of acquisitions and dispositions                                 |   |                                      |   |   |   |   |   |
| Contract  receivables, net                                                                                         |   | —                                    |   | 1,692 |   | 7,403 |   |
| Prepaid expenses  and other current assets                                                                         |   | (561                                      | )      | 1,018 |   | (1,369 | ) |
| Accounts payable  and accrued expenses                                                                             |   | 1,926                                     |   | (5,909 | ) | 7,680 |   |
| Income taxes  payable                                                                                              |   | (498                                      | )      | 1,035 |   | (6,292 | ) |
| Other operating  activities                                                                                        |   | 232                                       |   | (831 | ) | 1,364 |   |
| Net cash  provided by (used in) continuing operating activities before claims  resolution and reorganization items |   | (6,263                                    | )      | (12,717 | ) | 14,078 |   |
| Distributions to  allowed class 3 claim holders                                                                    |   | —                                    |   | (600 | ) | — |   |
| Net Cash (Used  in) Provided by Continuing Operating Activities Before  Reorganization Items                  |   | (6,263                                    | )      | (13,317 | ) | 14,078 |   |
| Net cash used in  discontinued operations                                                                          |   | —                                    |   | — |   | (14,685 | ) |
| Net Cash Used In  Operating Activities Before Reorganization Items                                                 |   | (6,263                                    | )      | (13,317 | ) | (607 | ) |
| Reorganization  items                                                                                              |   | —                                    |   | — |   | 8,611 |   |
| Adjustments to  reconcile reorganization items to cash used by Reorganization items:                               |   |                                      |   |   |   |   |   |
| Revaluation of  assets to fair value                                                                               |   | —                                    |   | — |   | (16,297 | ) |
| Interest Income                                                                                                    |   | —                                    |   | — |   | (976 | ) |
| Accrued  reorganization expenses                                                                                   |   | —                                    |   | — |   | 3,859 |   |
| Net cash used in  reorganization                                                                                   |   | —                                    |   | — |   | (4,803 | ) |
| Net cash used in  operating activities after reorganization items                                                  |   | (6,263                                    | )      | (13,317 | ) | (5,410 | ) |
| Investing  Activities                                                                                              |   |                                      |   |   |   |   |   |
| Sales of  subsidiaries                                                                                             |   | —                                    |   | — |   | 29,766 |   |
| Distributions  from 50% owned affiliate                                                                            |   | 15,650                                    |   | 7,900 |   | 5,050 |   |
| Effect on cash resulting  from deconsolidation of 50% owned investments                                            |   | —                                    |   | — |   | (5,243 | ) |
| Proceeds from  sale of investment                                                                                  |   | 4,521                                     |   | — |   | — |   |
| Proceeds from  sale of securities                                                                                  |   | 5,961                                     |   | — |   | — |   |
| Net Cash  Provided by Investing Activities from Continuing Operations                                              |   | 26,132                                    |   | 7,900 |   | 29,573 |   |
| Net cash used in  investing activities of discontinued operations                                                  |   | —                                    |   | — |   | (153 | ) |
| Net Cash  Provided by Investing Activities                                                                         |   | 26,132                                    |   | 7,900 |   | 29,420 |   |
| Financing  Activities                                                                                              |   |                                      |   |   |   |   |   |
| Distribution of  income to minority interest                                                                       |   | —                                    |   | — |   | (8,250 | ) |
| Release of  restricted cash                                                                                        |   | 1,435                                     |   | 802 |   | — |   |
| Change in cash  collateralized letters of credit                                                                   |   | —                                    |   | — |   | 193 |   |
| Transfer to  restricted cash                                                                                       |   | (4,508                                    | )      | — |   | — |   |
| Purchase of  preferred treasury stock                                                                              |   | (3,983                                    | )      | — |   | — |   |
| Extinguishment  of Senior Notes                                                                                    |   | —                                    |   | — |   | (1,000 | ) |
| Establishment of  cash reserve for unresolved claims                                                               |   | —                                    |   | (12,331 | ) | — |   |
| Distribution to  allowed class 4 claim holders                                                                     |   | —                                    |   | (13,065 | ) | — |   |
| Repurchase of  New Common stock pursuant to buy back                                                               |   | —                                    |   | (125 | ) | — |   |
| Payment of  preferred stock dividends                                                                              |   | (4,248                                    | )      | (2,360 | ) | — |   |
| Net Cash Used in  Financing Activities                                                                             |   | (11,304                                   | )      | (27,079 | ) | (9,057 | ) |
| Effect of  Exchange Rate Changes on Cash                                                                           |   | —                                    |   | — |   | — |   |
| Increase  (Decrease) in Cash and Cash Equivalents                                                                  |   | 8,565                                     |   | (32,496 | ) | 14,953 |   |
| Cash and Cash  Equivalents at Beginning of Period                                                                  |   | 8,848                                     |   | 41,344 |   | 26,391 |   |
| Cash and Cash  Equivalents at End of Period                                                                        |   | $                                         | 17,413 |   | $ | 8,848 |   | $ | 41,344 |   |

 

Seenotes to consolidated financial statements.

 

F-5

----

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO****CONSOLIDATED FINANCIAL STATEMENTS**

 

 

1.             Basis of Presentation

 

Kaiser Group Holdings,Inc. is a Delaware holding company that was formed on December 6, 2000 for thepurpose of owning all of the outstanding stock of Kaiser Group International,Inc. (Old Kaiser), which in turn continues to own the stock of its remainingsubsidiaries. On June 9, 2000, Old Kaiser and 38 of its domestic subsidiariesvoluntarily filed for protection under Chapter 11 of the United StatesBankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301). OldKaiser emerged from bankruptcy with an approved plan of reorganization (theSecond Amended Plan of Reorganization (the Plan)) that was effective onDecember 18, 2000 (the Effective Date). The Company is deemed a “successorissuer” to Old Kaiser by virtue of rule 12g-3(a) under the Securities ExchangeAct of 1934. References to the “Company” or “Kaiser Holdings” in this reportrefer to Kaiser Group Holdings, Inc. and its consolidated subsidiaries. Asummary of the Plan for Old Kaiser can be found in a Current Report on Form 8-Kdated December 5, 2000 filed by Old Kaiser.

 

Currently, apart fromresolving remaining bankruptcy claims, theCompany has only a limited number of activities, assets and liabilities,primarily consisting of:

 

•                  the ownership of a 50% interest inKaiser-Hill Company, LLC (Kaiser-Hill), which serves as the general contractorat the U.S. Department of Energy’s Rocky Flats Environmental Technology Sitenear Denver, Colorado, for the performance of a contract for the closure of thesite (the Closure Contract). (See note 7 for summarized financial information.)

•                  thecloseout and resolution of a completed contract for the engineering andconstruction of a steel mini-mill for Nova Hut in the Czech Republic (Nova Hutproject).

•                  theholding of an interest-bearing promissory note from ICF Consulting Group, Inc.(ICF Consulting), a division that Old Kaiser sold in 1999.

•                  a wholly ownedcaptive insurance company that is no longer issuing new policies and is simplyinvolved in resolving remaining claims.

•                  an ongoingobligation to fund a capped, post-employment medical benefit plan for a fixedgroup of retirees.

 

#### **2.             Changes in Accounting AffectingComparability of Financial Statements**

 

*Adoption of Fresh-Start Reporting:*TheCompany adopted fresh start reporting in its consolidated balance sheet as ofDecember 31, 2000. The American Institute of Certified Public Accountants’Statement of Position 90-7, “Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code” (SOP 90-7), requires that under certaincircumstances resulting from a bankruptcy, a new entity is created forfinancial reporting purposes upon the emergence of that entity from bankruptcy.  Accordingly, the value of the reorganizedenterprise becomes the established amount for the emerging balance ofshareholders’ equity, and any accumulated deficit of the predecessor entity isoffset against available paid-in-capital to result in an emerging retainedearnings of zero.  Additionally, assetsand liabilities are recorded at their fair values.  Since the financial information as of and subsequent to December31, 2000 has been prepared as if it is of a new reporting entity, a black lineseparates new entity information from prior entity information on theStatements of Operations, Statements of Comprehensive Income (Loss), Statementsof Shareholders’ Equity (Deficit) and the Statements of Cash Flows.  Such presentations were not prepared on abasis comparable to the prior year. Financial information with regard to activity occurring prior toDecember 31, 2000 has been included in these Financial Statements marked as“Predecessor”, and financial information with regard to activity as of December31, 2000 and thereafter is marked herein as “Successor”.

 

Thevalue of the emerged enterprise used for fresh start reporting as of December31, 2000 was $87.5 million and was determined by management with the assistanceof independent advisors.  Themethodology employed involved estimation of the enterprise value taking intoconsideration a discounted cash flow analysis. The discounted cash flow analysis was based on a seven-year cash flowprojection prepared by management, taking into consideration the terminal valueof its assets and liabilities as of immediately prior to its emergence frombankruptcy on December 18, 2000. Terminal values of assets and liabilities were determined based eitheron contracted amounts, actuarial present values and/or management’s estimatesof the outcome of certain operating activities. Net after-tax cash flows,assuming a 40% effective tax rate, were discounted at 17% in order to take intoconsideration the risks and uncertainties inherent in such projections.  The cash flow projections were based onestimates and assumptions about circumstances and events that had not yet takenplace.  Estimates and assumptionsregarding individual retained matters which form the collective composition ofthe overall enterprise value as of December 18, 2000 are inherently subject tosignificant economic and competitive uncertainties and contingencies beyond thecontrol of the Company.  Accordingly,there may be differences between projections and actual results because eventsand circumstances frequently do not occur as expected and may besignificant.  More specifically,assumptions within the

 

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valuationrelated to the amount and timing of the ultimate performance and related cashflows of the Company’s investment in Kaiser-Hill have the greatest impact onthe overall enterprise valuation.

 

Theadjustments that reflected the adoption of “fresh start” reporting, includingthe December 31, 2000 adjustments to record assets and liabilities at theirfair market values, were reflected in the financial statements as a componentof Reorganization Items.  In addition,the Successor Company’s opening balance sheet was further adjusted to eliminateexisting equity and to reflect the aforementioned $87.5 million enterprisevalue.

 

*Investment in Kaiser-Hill:* Prior to June 8, 2000, through a designatedmajority representation on Kaiser-Hill Company, LLC’s board of managers, theCompany had a controlling interest in Kaiser-Hill and therefore consolidatedKaiser-Hill’s results of operations with those of its only other remainingbusiness segment, the Engineers and Constructors Group. Effective June 8, 2000,the Company adopted the equity method of accounting for Kaiser-Hill coincidentwith its signing of an agreement whereby the other 50% owner has the right todesignate 3 out of the 5 members of Kaiser-Hill’s board of managers. TheCompany retains the right to designate 2 out of the 5 members of Kaiser-Hill’sboard of managers. Accordingly, the financial information contained herein forKaiser-Hill is reflected on a consolidated basis for all periods presentedthrough June 8, 2000, and financial information for periods after June 8, 2000is reflected on the equity method.

 

Duringearly 2001, Kaiser-Hill reduced its estimate of total cost at completion to$4.5 billion from the original $4.8 billion. This reduction in estimated cost at completion had the financialstatement result of increasing its accrual of the fee to be earned over the contractduration from $150.0 million to $180.0 million.  Kaiser-Hill continued to make favorable progress on the ClosureContract during 2001 and, during the quarter ended December 31, 2001, amendedits estimate for the physical contract completion date from December 31, 2007to December 31, 2006 and changed its estimate of the total cost to be incurredduring the Closure Contract duration to be below $4.0 billion.  Therefore, Kaiser-Hill management increasedits estimate of the fee to be earned over the contract duration from the $180.0million to $355.0 million.

 

***Discontinued operations***:  Through several separatetransactions in 2000, the Company divested of the majority of its operatingactivities.  The financial operations ofthe divested operations and non-divested engineering operations have beenpresented as “discontinued operations” for all periods presented.

 

3.             GeneralTerms of Plan and Status of Bankruptcy Distributions

 

The effectiveness of theOld Kaiser Plan of Reorganization as of December 18, 2000 did not, in and ofitself, complete the bankruptcy process. The process of resolving in excess of$500 million of claims initially filed in the bankruptcy is ongoing. Old Kaiserobjected to the majority of the unresolved claims, and if such claims are notsettled via the objection or dispute resolution processes or other means, theywill ultimately be heard and determined by the Bankruptcy Court. Once a claimis resolved with an amount due to the creditor, such portion of the claim isdeemed to be an allowed claim by the Bankruptcy Court (an allowed claim). TheCompany cannot predict with accuracy when the claims resolution process will becomplete or what the total amount of allowed claims will be upon completion.

 

In general terms, thePlan contemplated three basic classes of creditors:

 

•                  Allowed“Class 3 claims” against the Old Kaiser bankruptcy estate generally consistedof trade and similar creditors’ claims of $20,000 or less.  Holders of allowed Class 3 claims receivedcash for their claims.

 

•                  Allowed“Class 4 claims”, the largest class of claims against the Old Kaiser bankruptcyestate, is made up of creditor claims other than Class 3 claims and equityclaims. Class 4 claims included holders of Old Kaiser senior subordinated notesdue 2003 (Old Subordinated Notes). Holders of allowed Class 4 claims received acombination of cash and Kaiser Holdings preferred and common stock in respectof their claims. Such holders received one share of Kaiser Holdings’ preferredstock (New Preferred) and one share of Kaiser Holdings’ common stock (New Common)for each $100 of claims. However, the number of shares of New Preferred issuedwas reduced by one share for each $55.00 of cash received by the holder of anallowed Class 4 claim.

 

•                  Thethird class of claims recognized in the Old Kaiser bankruptcy are equityclaims, consisting of holders of Old Kaiser common stock (Old Common) and other“Equity Interests” as defined in the Plan. Under the Plan, holders of EquityInterests will receive a number of shares of New Common equal to 17.65% of thenumber of shares of such common stock issued to holders of allowed Class 4Claims. In the initial distribution, one share of New Common was issued foreach 96 shares of previously outstanding Old Common. Additional distributionsof New Common may be made in the future as additional shares of New Common areissued to holders of newly allowed Class 4 claims, if any. Apart from holdersof Old Common, the only holders of Equity Interests of which the Company is

 

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aware are the formershareholders of ICT Spectrum Constructors, Inc., a corporation acquired bymerger with a subsidiary of Old Kaiser in 1998. The Bankruptcy Court confirmedthe equity nature of those claims.

 

Pursuant to the terms ofOld Kaiser’s Plan, the Company was required to complete its initial bankruptcydistribution within 120 days of the effective date of the Plan.  Accordingly, on April 17, 2001, the Companyeffected its initial distribution.  Atthat time, there were approximately $136.8 million of Class 4 claims that hadbeen allowed in the bankruptcy process. The amount of unresolved claims remaining at April 17, 2001 wasapproximately $130.5 million.

 

To address the remainingunresolved claims, the Bankruptcy Court issued an order on March 27, 2001establishing an Alternative Dispute Resolution (ADR) procedure whereby theremaining claimants and Old Kaiser produce limited supporting data relative totheir respective positions and engage in initial negotiation efforts in anattempt to reach an agreed claim determination.  If necessary, the parties are thereafter required to participatein a non-binding mediation before a mediator pre-selected by the BankruptcyCourt.  All unresolved claims as ofMarch 27, 2001 are subject to the ADR process. Since April 17, 2001, the dateof the initial distribution, $94.9 million of asserted claims have beenwithdrawn, negotiated or mediated to an agreed amount, resulting in cashpayments approximating $1.1 million and issuances of 683 shares of NewPreferred and 823 shares of New Common. As of March 25, 2002, the amount ofunresolved claims was approximately $43.2 million. The Company expects thatsubstantial progress will continue to be made in the resolution of claims overthe balance of 2003.  The Company currentlybelieves that the amount of Class 4 claims ultimately to be allowed in the OldKaiser bankruptcy proceeding will not exceed $145.0 million.  As demonstrated by the claim settlementscompleted since April 17, 2001, and based on the belief that it is in the bestinterest of the Company and its current shareholders, the Company has beensettling certain remaining Class 4 claims entirely for cash payments in lieu ofthe combination of cash and New Preferred and New Common as contemplated in thePlan.  The Company intends to continueto use this settlement alternative during its resolution of remaining Class 4claims, but has no ability to determine the effect of the outcome on itsoverall financial condition in the event such settlements are accepted in the future.

 

With respect to theunresolved claims, the Plan required that, at the date of the initialdistribution, sufficient cash reserves to be retained by the Company such thatif all remaining unresolved claims were ultimately deemed allowed at the originallyclaimed amount, the Company would be able to satisfy the allowed claims,including dividends accruing on related preferred stock, since April 17,2001.  The cash reserve requirement, andthe fact that the Company had not yet received a substantial cash payment theCompany asserted it was due from Nova Hut, limited the amount of cash availableat the time of the initial distribution to the holders of allowed Class 4claims. The Company determined that an aggregate of $25.0 million, orapproximately $0.09347 per $1.00 of allowed and “deemed allowed” Class 4claims, was available at the time of the initial distribution to allowed Class4 claim holders.  Thus, more shares ofNew Preferred were issued than would have been had the claims resolutionprocess advanced more quickly and had more cash been available from the NovaHut project and/or other sources.  Dueto the proportion of remaining unresolved Class 4 claims in relation to thetotal of all resolved and unresolved claims, approximately $12.3 million of the$25.0 million in available cash was reserved and classified as Restricted Cashon April 17, 2001.

 

From time-to-time in thefuture, as remaining unresolved claims are resolved, excess cash from the“reserve” fund (including cash added to “reserve” fund in payment of pro formadividends on retained shares of New Preferred) must be used to redeemoutstanding shares of New Preferred.

 

4.             Significant Accounting Policies **-**SuccessorCompany:

 

**Principles of Consolidation: Theconsolidated financial statements include all majority-owned or controlledsubsidiaries. Investments in unconsolidated affiliated companies and jointventures are accounted for using the equity method. The difference between thecarrying value of the joint venture investment and the Company’s underlyingequity is amortized on a straight-line basis over the estimated term of thejoint venture investment. All significant intercompany balances andtransactions have been eliminated.**

 

IncomeTaxes: Deferred tax assets and liabilities represent the tax effects ofdifferences between the financial statement carrying amounts and the tax basescarrying amounts of the Company’s assets and liabilities. These differences arecalculated based upon the statutory tax rates in effect in the years in whichthe differences are expected to reverse. The effect of subsequent changes intax rates on deferred tax balances is recognized in the period in which a taxrate change is enacted. The Company evaluates its ability to realize futurebenefit from all deferred tax assets and establishes valuation allowances foramounts that may not be realizable.

 

EarningsPer Share:  Basic EPS is computed bydividing net income (loss) by the weighted average number of common sharesoutstanding for the period.  Theweighted average shares outstanding for the year ended December 31, 2001retroactively adjusts for the conversion of the Old Common to New Commoneffective with the adoption of fresh-start

 

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reporting.  As additional distributions of KaiserHoldings common stock are made to holders of newly allowed Class 4 claims, theconversion ratio of 96 shares may be adjusted to reflect the final total numberof shares of New Common (as discussed in Note 3).  Because Kaiser Holdings is assumed to be a new entity (asdiscussed in Note 1), periods prior to the adoption of fresh-start reportinghave not been restated.

 

DilutedEPS normally includes the weighted-average effect of dilutive securitiesoutstanding during the period. Pursuant to the Company’s Plan of Reorganizationthat was effective as of December 18, 2000, all then outstanding common stockequivalents were cancelled. Accordingly, no anti-dilutive information ispresented herein.

 

Theeffect of preferred dividends of $4.2 million and $3.1 million has beenincluded in continuing operations in the calculation of basic and dilutedearnings per share for the year ended December 31, 2002 and 2001, respectively.

 

ForeignCurrency Translation:  Results ofoperations for foreign entities are translated using the average exchange ratesduring the period. Assets and liabilities are translated to U.S. dollars usingthe exchange rate in effect at the balance sheet date. Resulting translationadjustments are reflected net of tax in shareholders’ equity as cumulativetranslation adjustments.

 

CashEquivalents and Restricted Cash: The Company considers all highly liquidfinancial instruments purchased with maturities of three months or less at dateof purchase to be cash equivalents. Restricted cash balances consisted of thefollowing at December 31 (in thousands):

 
|                                                                  |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Letters of credit collateralized by cash                              |   | $        | — |     | $      | 600 |   |
| Cash reserved for future claim settlements and  accumulated dividends |   | 6,506    |   | 7,707    |   |
| Cash reserved for future New Preferred redemptions                    |   | 9,264    |   | 3,850    |   |
| Cash balances of wholly owned insurance subsidiary                    |   | 2,909    |   | 2,852    |   |
| Escrowed cash                                                         |   | —   |   | 835      |   |
|                                                                  |   | $        | 18,679 |     | $      | 15,844 |   |

 

Supplementalcash flow information for the years ended December 31, is as follows:

 
|                                                                 |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash payments for income taxes                                       |   | $        | 930    |     | 99     |   |
| Reclass of restricted cash to net assets of  discontinued operations |   | —   |   | 11,100   |   |
| Non cash transactions:                                               |   |     |   |     |   |
| Retirement of Old Common                                             |   | —   |   | 234      |   |
| Issuance of Preferred Stock                                          |   | 38       |   | 62,481   |   |
| Issuance of New Common                                               |   | —   |   | 16       |   |
|                                                                      |        |          |        |          |        |  |

 

Marketable Securities:  In December 2001, the Company recorded a gain on the stockdemutualization of a non-affiliated insurance company.  The gain was calculated based upon the fairvalue of the securities on the date of the insurance company’s initial publicoffering. These securities were classified as available for sale on the balancesheet as of December 31, 2001 and were sold in February 2002.  Investments classified as available for saleare measured at fair value in the financial statements with unrealized gainsand losses reported, net of tax, in other comprehensive income (loss).

 

# **Adoption ofFAS 142:  The Company adopted Statementof Financial Accounting Standards No. 142 (FAS 142), *Goodwill and Other Intangible Assets*effective January 1,2002.  Under FAS 142, intangible assetswith indefinite lives will no longer be amortized but are reviewed annually (ormore frequently if impairment indicators arise) for impairment.  Recognized intangible assets with determinableuseful lives will continue to be amortized. The Company’s only intangible asset relates to its investment inKaiser-Hill recorded upon the adoption of fresh-start reporting.  This intangible asset of $21.1 million isbeing amortized on a straight-line basis through 2006, which is the datecurrently estimated for Kaiser-Hill’s completion of the Closure Contract. Totalaccumulated amortization as of December 31, 2002 was $7.0 million.  The amortization expense associated withthis intangible is recorded as a reduction to the equity income in earnings ofaffiliate on the consolidation statement of operations.  The estimate amortization expense for theremaining life of this intangible asset is:**

 

| **Year  ending  December 31:** |   | **Amount******             |   |
|--------------------------------|--------|----------------------------|--------|
|                           |   | **(dollars in thousands)** |   |
| 2003                           |   | 3,524                      |   |
| 2004                           |   | 3,524                      |   |
| 2005                           |   | 3,524                      |   |
| 2006                           |   | 3,524                      |   |
|                           |   | 14,096                     |   |

 

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Use of Estimates: The preparation of financial statements in conformitywith generally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosed amounts of contingent assetsand liabilities at the date of the financial statements, and the amounts ofrevenues and expenses recognized during the reporting period.  Such estimates include those related toallowances for contract and notes receivable and accrued interest, deferred taxassets and valuation allowance, recoverability of net assets of discontinuedoperations and other investments, assumptions used to determine the retireemedical obligation, the amortization period for the excess value attributed tothe Kaiser-Hill investment and the remaining Allowed Claims. Actual resultscould differ from those estimates.

 

Concentrationsof Credit Risk: The Company maintains cash balances primarily in overnightEurodollar deposits, investment-grade commercial paper, bank certificates ofdeposit, and U.S. government securities.

 

Reclassifications:   Certain reclassifications have been made tothe prior-period financial statements contained herein in order to conform themto the 2002 presentation.

 

New AccountingPronouncements:  In June 2002, the FASBissued FAS 146, *Accounting for CostsAssociated with Exit or Disposal Activities*, which addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (EITF) 94-3, *Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*. FAS 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred as opposed towhen an entity commits to an exit plan as prescribed under EITF 94-3.  FAS 146 also establishes that the initialliability be measured at fair value. FAS 146 is effective for activities that are initiated after December31, 2002, and management does not believe its adoption will have a materialimpact on the financial statements of the Company.

 

5.             Net Assets of DiscontinuedOperations

 

Thecomponents of the “Net Assets of Discontinued Operations” consist entirely ofthe carrying value of the net assets of the Nova Hut project and were asfollows at December 31: 

 
|                                                |   | **2002** |   | **2001** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|
|                                                |   |     |   |     |   |
| Cash                                                |   | $        | 26     |     | $      | 6 |   |
| Letter of credit cash  collateral drawn by Nova Hut |   | 11,100   |   | 11,100   |   |
| Retained accounts receivable                        |   | 20,126   |   | 21,274   |   |
| Prepaid expenses and other  current assets          |   | 1        |   | 1        |   |
| Subcontractor retentions and other accounts payable |   | (8,000   | )      | (6,276   | )      |
|                                                |   | 23,253   |   | 26,105   |   |
| Allowance for estimated loss                        |   | (17,253  | )      | (20,105  | )      |
|                                                |   | $        | 6,000  |     | $      | 6,000 |   |

 

Although Old Kaiser sold its Metals, Mining andIndustry business unit in August 2000, it retained its Netherlands subsidiary,Kaiser Netherlands, B.V., which had been responsible for a turnkey engineeringand construction services contract for the construction of a steel mini-mill inthe Czech Republic for Nova Hut.  Afterconstruction of the mini-mill was complete in 2000, the contract with Nova Hutprovided for a maximum of three possible performance tests. The firstperformance test was completed on November 13, 2000. Kaiser Netherlandsbelieves that the first performance test was successful and that Nova Hutshould have agreed to final acceptance of the mini-mill and made final paymentof amounts accrued by Kaiser Netherlands throughout the project.  Rather, Nova Hut asserted that the firsttest was not successful. Kaiser Netherlands believes that such contention mayhave been put forth in response to severe financial constraints on Nova Hut’soperations resulting from weakening conditions in the worldwide steel marketand the significant amounts that Kaiser Netherlands believed it was contractuallydue. To date, this dispute has not been resolved, and Kaiser Netherlands hasresorted to legal proceedings to enforce its rights.  The primary legal venue at this time is the Delaware bankruptcyproceeding for Old Kaiser, where the Company has asserted claims against NovaHut and the International Finance Corporation. The litigation of this dispute, as well as the cost of a possibleongoing presence in Ostrava, Czech Republic, has had and may continue to have anegative impact on the cash flow of Kaiser Netherlands and Kaiser Holdings.

 

Basedon the Company’s continued concern over Nova Hut’s financial difficulties andthe uncertainties of a settlement resulting from a bankruptcy court-sponsoredmediation, in the fourth quarter of 2001, the Company reduced the carryingvalue of the remaining Nova Hut project assets from $21.6 million to $6.0million by recording a reserve of approximately $9.8 million, net of a$5.8 million income tax benefit, through acharge to “Loss from Discontinued Operations”.  This adjustment to the project asset carrying value was based onthe Company’s estimate of Nova Hut’s current ability to pay such liability.

 

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6.             Business Segments and ForeignOperations:

 

Business Segments:  The Companyhad no reportable segments at any time during 2002 or 2001.

 

ForeignOperations: Because all of the Company’s international operations are presentedin the accompanying Statements of Operations as “Discontinued Operations,” allof the Company’s reported gross revenue and operating income (loss) fromcontinuing operations were from domestic sources.  Remaining foreign assets consist solely of the carrying value ofthe net realizable value of the Nova Hut contract matter (See “Net Assets ofDiscontinued Operations” and “Other Contingencies”).

 

7.             Joint Ventures andAffiliated Companies

 

Prior to December 31, 2000, the Company had ownership interests incertain unconsolidated corporate joint ventures and affiliated companies.   During 1999 and 2000, the Company divestedof the majority of such investments (Note 17 – Notes Applicable Solely to thePredecessor Company - Divestitures and Acquisitions).  At December 31, 2002 and 2001, it retained a 50% investment inKaiser-Hill (See Notes 1 and 2) and at December 31, 2001 it retained a 10%ownership in ICF Consulting.  TheCompany’s net investments in/or amounts due from this corporate joint ventureand affiliated company totaled $45.7 million and $29.2 million at December 31,2002 and 2001, respectively. Prior to the sale of ICF Consulting investment in2002, the Company accounted for the ICF Consulting investment using the costmethod and for the Kaiser-Hill Company LLC investment using the equitymethod.  The difference between theCompany’s carrying value of the investment in Kaiser-Hill and its 50%underlying equity in Kaiser-Hill’s net assets was $14.1 million and $17.6million, respectively, as of December 31, 2002 and 2001 and is being amortizedon a straight-line basis through 2006 (the date currently estimated forKaiser-Hill’s completion of the Closure Contract.)

** **

ICF Consulting Group,Inc.:  In 2002, a settlement was reached between the Company and ICF Consulting,whereby the Company agreed to restructure the ICF Consulting notes totaling$6.6 million and accrued interest of $0.7 million, net of reserves, for a newpromissory note of $6.4 million (New Note) bearing interest at 8.5% perannum.  In return ICF Consulting agreedto withdraw all claims against the Company, release cash in escrow and purchasethe Company’s 10% ownership in ICF Consulting, carrying value of $1.1 million,for $4.5 million.  See Note 8 below.

 

**Kaiser-Hill:   Summarized financial information ofKaiser-Hill Company was as follows as of December 31 (in thousands):**

 
|                    |   | **2002** |    | **2001** |   | **2000** |   |
|-------------------------|--------|----------|---------|----------|--------|----------|--------|
|                    |   |     |    |     |   |     |   |
| Current assets          |   | $        | 115,030 |     | $      | 136,056  |   | $ | 132,485 |   |
| Non-current assets      |   | 78,734   |    | 17,441   |   | 430      |   |
| Current liabilities     |   | 107,586  |    | 125,377  |   | 131,879  |   |
| Non-current liabilities |   | 28,644   |    | 12,800   |   | —   |   |
| Gross revenue           |   | 732,718  |    | 718,788  |   | 673,751  |   |
| Net income              |   | 73,514   |    | 30,084   |   | 20,436   |   |
|                         |        |          |         |          |        |          |        |  |  |  |

 

Under the Closure Contract, Kaiser-Hill is notresponsible for, and the DOE pays all costs associated with, any liability,including, without limitation, any claims involving strict or absolute liabilityand any civil fine or penalty, expense, or remediation cost, but limited tothose of a civil nature, which may be incurred by, imposed on, or assertedagainst Kaiser-Hill arising out of any act or failure to act, condition, orexposure which occurred before Kaiser-Hill assumed responsibility on July 1,1995 (“pre-existing conditions”). To the extent the acts or omissions ofKaiser-Hill constitute willful misconduct, lack of good faith, or failure toexercise prudent business judgment on the part of Kaiser-Hill’s managerialpersonnel and cause or add to any liability, expense, or remediation costresulting from pre-existing conditions, Kaiser-Hill is responsible, but onlyfor the incremental liability, expense, or remediation caused by Kaiser-Hill.

 

The Closure Contract further provides that Kaiser-Hillwill be reimbursed for the reasonable cost of bonds and insurance allocable tothe contract and for liabilities and expenses incidental to these liabilities,including litigation costs, to third parties not compensated by insurance orotherwise. There is an exception to this reimbursement provision applicable toliabilities caused by the willful misconduct, lack of good faith or failure toexercise prudent business judgment by Kaiser-Hill’s managerial personnel.

 

With respect to arevolving credit facility obtained by Kaiser-Hill in November 1999, bothparents of Kaiser-Hill granted a first lien security interest to theKaiser-Hill lenders in all of the ownership and equity interest of Kaiser-Hilland have agreed to cure any events of default by Kaiser-Hill on thefacility.  As of December 31, 2002 and 2001, Kaiser-Hill had no cash balancesoutstanding on its revolving credit.

 

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8.             Notes receivable

 

In June 2002, a settlement was reached between the Company and ICFConsulting, whereby the Company agreed to restructure the ICF Consulting notestotaling $6.6 million and accrued interest of $0.7 million, net of reserves,for a new promissory note of $6.4 million (New Note) bearing interest at 8.5%per annum.  The New Note is subordinatedto the rights to ICF Consulting’s senior bank lenders.  In return ICF Consulting agreed to withdrawall claims against the Company, release cash in escrow totaling $0.8 million andpurchase the Company’s 10% ownership in ICF Consulting, carrying value of $1.1million, for $4.5 million.

 

AtDecember 31, 2002, all terms of the settlement agreement between the Companyand ICF Consulting had been implemented.  Due to uncertainties about the ultimate collectibility of the New Noteand accrued interest, and considering the fact that ICF Consulting haddefaulted on the previously held ICF Consulting notes, the Company has recordeda reserve of $0.5 million against the New Note.

** **

**Prior to the aforementionedsettlement, the Company owned a 10% interest in ICF Consulting Group, Inc., aprivately held entity.  This interestwas retained by Old Kaiser when it sold its Consulting Group in June 1999.  In connection with the sale, the Companyaccepted two promissory notes as part of the total consideration received. Thenotes were subject to reduction in the event that certain divestiture-relatedcontingencies were not resolved as originally anticipated in the related saleagreement. Amounts payable by ICF Consulting on such notes were subject to (1)the rights of holders of ICF Consulting’s senior lenders and (2) possiblereduction as a result of indemnification claims asserted by ICF Consultingpursuant to the agreements entered into by the parties at the time of OldKaiser’s sale of its Consulting Group. The accrued interest receivable was $1.7 million as of December 31,2001.**

 

Basedon developments in 2001, the Company deemed it prudent to establish a $1.0million reserve, through a reduction of interest income, for uncertainties overthe collectibility of the combined carrying value of the escrowed cash, thepromissory notes and the interest receivable. This reserve is reflected on the Consolidated Balance Sheets as part ofPrepaid Expenses and Other Current Assets.

 

9.             Preferred Stock

 

KaiserHoldings’ certificate of incorporation authorizes the issuance of 2,000,000shares of New Preferred. Resulting from its initial bankruptcy distribution onApril 17, 2001 (see Note 3), the Company had $55.9 million, net of $6.6 millionof treasury stock, and $62.5 million in New Preferred outstanding at December31, 2002 and 2001, respectively. The New Preferred is a series of authorizedpreferred stock designated as “Series 1 Redeemable Cumulative Preferred Stock,”and has a par value of $0.01 per share. The New Preferred ranks ahead of KaiserHoldings’ New Common.

 

Pursuantto approval by the Company’s Board of Directors, in 2002 the Company purchased119,587 shares of outstanding New Preferred at prices ranging from $25.62 to$34.02 per share.  The treasury shareshave been recorded at liquidation preference, $55 per share, as a reduction topreferred stock and the remaining difference between cost and the liquidationpreference was recorded as an increase to paid-in capital.

 

Thecertificate of incorporation of Kaiser Holdings and Delaware law permit theBoard of Directors to issue additional series of preferred stock, except thatthe Board of Directors may not authorize the issuance of any securities that ranksenior to or on a parity with the New Preferred without the consent of holdersof at least two-thirds of the New Preferred.

 

Cumulativedividends on the New Preferred are payable on a quarterly basis, as of April30, July 31, October 31 and January 31, either in cash at an annual rate of 7%of the liquidation preference per share or in additional shares of NewPreferred at an annual rate of 12% of the per share liquidation preference.Dividends accrue on the New Preferred commencing with the initial distributiondate, April 17, 2001. Dividends will not be paid to any affiliate of KaiserHoldings on account of that affiliate’s ownership of shares of preferred stock.If Kaiser Holdings fails to pay a quarterly dividend when due, holders of NewPreferred will have the right to elect an additional director for each dividendpayment missed, up to a maximum of two additional directors, but only untilsuch dividend is paid or provided for in full.   The dividend due to holders of record on January 31, 2003, totalingapproximately $1.0 million, was paid on February 7, 2003.  At December 31, 2002, in addition to the$4.0 million of cash reserves for unresolved claims, the Company had $2.5million in cash reserved for the payment of accrued dividends on any future issuancesof New Preferred issued as a result of remaining bankruptcy claims resolutions(any New Preferred issued as a result of claims resolutions also carries theright to dividends retroactively from April 17, 2001).

 

TheNew Preferred has a liquidation preference of $55 per share plus the amount ofunpaid dividends, if any. Upon the liquidation or dissolution of KaiserHoldings, each holder of New Preferred (other than an affiliate of KaiserHoldings) is

 

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entitledto this per share liquidation preference before any holders of New Common orany other junior securities of Kaiser Holdings receive any payment for theirshares. If, in a liquidation or dissolution setting, assets remaining afterdistribution to holders of debt and other obligations are insufficient to payall holders of New Preferred the per share liquidation preference, then suchassets will be distributed on a proportionate basis to the holders of NewPreferred (other than affiliates of Kaiser Holdings) and any securities rankingon a parity with the New Preferred.

 

TheCompany has the option to redeem the New Preferred at any time, in whole or inpart, at a redemption price of 100% of the liquidation preference per shareplus all accrued and unpaid dividends. The Company is required to offer topurchase the New Preferred at 100% of the liquidation preference per share plusall accrued and unpaid dividends in connection with a change of control ofKaiser Holdings.  In addition, any netproceeds in excess of $3 million in a calendar year received by the Company orany of its direct or indirect subsidiaries from the disposition of assets to anunaffiliated party outside of the ordinary course of business must be used toredeem New Preferred at a redemption price of 100% of the liquidationpreference per share plus all accrued and unpaid dividends. Furthermore, to theextent that certain categories of cash are received from Nova Hut, such cashmust be used to redeem New Preferred at a redemption price of 100% of theliquidation preference per share plus all accrued and unpaid dividends.

 

Alloutstanding shares of New Preferred are required to be redeemed by the Companyon or before December 31, 2007, and if such redemption does not occur, holdersof New Preferred will be entitled to elect two-thirds of the directors of theCompany. If shares of preferred stock are held by any affiliate of the Company,those shares may not be redeemed pursuant to any of the redemption provisionsotherwise applicable to the New Preferred.

 

Holders of New Preferredgenerally are entitled to vote with holders of New Common on all matterssubmitted to a vote of shareholders, with each share of New Preferred beingentitled to one-tenth of a vote. In addition, holders of New Preferred have theright to vote separately as a class to exercise their right to elect anadditional director due to a failure to pay a quarterly dividend, to electtwo-thirds of the directors if the New Preferred is not redeemed by December31, 2007, and to consent to the issuance of any senior or parity securities.The terms of the New Preferred may not be materially or adversely modifiedwithout the consent of holders of at least two-thirds of the New Preferred. Ifthe Company or any of its affiliates holds any New Preferred, they will not beentitled to vote that New Preferred.

 

ThePlan provides that Major Stockholders (defined as holders of 10% or more of theoutstanding shares of New Preferred or New Common, or a person who is an“affiliate” of Kaiser Holdings as defined under the Federal securities laws)have certain registration rights. In general, a Major Stockholder may requestKaiser Holdings to register under the Securities Act of 1933 for the sale ofall, but not less than all, of the New Preferred and/or New Common owned by theMajor Stockholder. Upon request for such a registration from a MajorStockholder, Kaiser Holdings is required to give notice to other MajorStockholders and use its best efforts to cause a registration statement to becomeeffective as expeditiously as possible and maintain such registration statementcurrent for a period of 12 months. Major Stockholders are not entitled torequest registration until one year after the Effective Date, and KaiserHoldings is not obligated to file a registration statement in response to arequest from a Major Stockholder until such time as Kaiser Holdings is eligibleto use Form S-3 under the Securities Act of 1933 for such an offering. KaiserHoldings is not required to effect more than one registration for MajorStockholders during any twelve-month period. These registration rights expireon December 31, 2007. The Plan also contemplates that Major Stockholders willhave “piggyback” registration rights in connection with a proposed underwrittenpublic offering of Kaiser Holdings New Common or New Preferred solely for cashand for its own account.

 

KaiserGovernment Programs, Inc.’s (“KGP”) Put Rights 

 

KGPis the Company subsidiary that owns (through a wholly owned subsidiary of KGP)the 50% interest in Kaiser-Hill Company LLC. KGP has outstanding put rights, expiring on December 31, 2007, thatobligate it to purchase New Preferred owned by a holder of the put right, atthe holder’s option, under three circumstances:

 

**•**                  if KGP receives net after-tax proceeds from any cash distributions fromKaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of cashrequired to pay all past accrued but unpaid cash dividends on the NewPreferred, plus the next scheduled quarterly cash dividend on New Preferred;

•                  if KGP receives netafter-tax proceeds from any director indirect disposition of any interest in Kaiser-Hill; or

•                  if KGP receives net after-tax proceeds from anextraordinary distribution from Kaiser-Hill.

 

Uponexercise of a put, KGP will pay an exercising holder 100% of the liquidationpreference of the preferred stock that is the subject of the KGP put rights,plus all accrued and unpaid dividends on the preferred stock. KGP will purchaseshares of preferred stock on a pro rata basis based upon the number of sharesof preferred stock as to which puts have been properly exercised, but only upto the amount of the available net after-tax proceeds from triggering events.KGP will not purchase

 

F-13

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anyfractional shares. KGP put rights will not become exercisable more frequentlythan every 12 months unless the cumulative amount of available net after-taxproceeds from triggering events is at least $3 million.  KGP put rights are transferable except thatputs shall cease to be transferable if KGP determines that any further transferwould require registration of the puts as a class of securities under theSecurities Exchange Act of 1934. Kaiser Holdings does not presently plan toarrange for trading of the KGP put rights on the NASD electronic bulletin boardor otherwise.

 

The Companyreceived distributions from Kaiser-Hill during the fourth quarter of 2002 in anamount that triggered the put rights. However, rather than using the mechanism of the put rights to satisfythe Company’s obligations to holders of the put rights, the Company redeemed$15.5 million liquidation preference of New Preferred as of January 31,2003.  In addition to the funds requiredto be used to redeem New Preferred under the terms of the New Preferred, theCompany used cash from operations (including distributions from Kaiser-Hill) tofund the redemption.  The amount of cashfrom operations used for that purpose exceeded the amount required to be usedby KGP to fund its put right obligations. The Company believes this is a more cost-efficient manner of satisfyingthe obligations associated with the KGP put rights and plans to continue to usethe redemption process to satisfy such obligations.

 

10.           New Common Stock

 

TheKaiser Holdings certificate of incorporation authorizes the issuance of3,000,000 shares of New Common. Pursuant to the Company’s Plan, holders of Allowed Class 4 Claims andAllowed Class 5 Equity Interests are to receive shares of New Common Stock underthe Plan.

 

Inconnection with its initial distribution out of bankruptcy on or about April17, 2001, Kaiser Holdings issued to holders of Allowed Class 4 Claims one shareof New Common for each $100.00 of such holder’s respective Allowed Class 4Claim.  Subsequent to April 17, 2001,823 shares of New Common have been issued related to the settlement of claims.

 

Holdersof Allowed Class 5 Equity Interests received their pro rata portion of NewCommon representing 15% of the aggregate amount of New Common to be outstandingfollowing distributions to holders of Allowed Class 4 Claims and Allowed Class5 Equity Interests. This outcome was accomplished by issuing to each holder ofan Allowed Class 5 Equity Interest its pro rata portion of the number of sharesof New Common that represents 17.65% of the total number of shares of NewCommon issued from time to time to holders of Allowed Class 4 Claims.

 

Allshares of New Common, at issuance, were duly authorized, fully paid andnon-assessable. The holders of such shares will have no preemptive or otherrights to subscribe for additional shares. The New Common has a par value of$0.01 per share. Based on its current estimates of the aggregate amount ofAllowed Class 4 Claims and cash available for distribution, Kaiser Holdingsexpects to ultimately issue no more than 1,715,000 shares of New Common toholders of Allowed Class 4 Claims and Allowed Class 5 Equity Interests.

 

OldKaiser never paid cash dividends on its Old Common. Kaiser Holdings anticipatesthat for the foreseeable future no cash dividends will be paid on the NewCommon and that Kaiser Holdings’ earnings will be utilized to redeem NewPreferred or retained for use in the business. The Board of Directors of KaiserHoldings will determine its dividend policy based on its results of operations,payment of dividends on, and redemption of, New Preferred, financial condition,capital requirements, and other circumstances.

 

11.           Leases

 

TheCompany has no capital leases or any material noncancelable operating leaseswith initial or remaining terms in excess of one year at December 31, 2002. Thetotal rental expense for all operating leases was $141,000 and $628,000 duringthe years ended December 31, 2002 and 2001.

 

12.           Income Taxes

 

Thecomponents of net income (loss) used to compute the (expense) benefit forincome taxes for the years ended December 31 were as follows (in thousands):

 

F-14

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|                                                                           |   | **Successor Company** |    | **Predecessor  Company** |   |
|--------------------------------------------------------------------------------|--------|-----------------------|---------|--------------------------|--------|
|                                                                           |   | **2002**              |    | **2001**                 |   | **2000** |   |
| Income from continuing operations before income taxes  and minority interests: |   |                  |    |                     |   |   |   |
| Domestic                                                                       |   | $                     | 29,165  |                     | $      | 7,657 |   | $ | 6,875 |   |
| Foreign                                                                        |   | —                |    | —                   |   | — |   |
|                                                                           |   | $                     | 29,165  |                     | $      | 7,657 |   | $ | 6,875 |   |
| (Expense) benefit for income taxes:                                            |   |                  |    |                     |   |   |   |
| Federal:                                                                       |   |                  |    |                     |   |   |   |
| Current                                                                        |   | $                     | (243    | )                        | $      | (809 | ) | $ | 32,839 |   |
| Deferred                                                                       |   | (9,711                | )       | (1,222                   | )      | — |   |
|                                                                           |   | (9,954                | )       | (2,031                   | )      | 32,839 |   |
| State:                                                                         |   |                  |    |                     |   |   |   |
| Current                                                                        |   | (121                  | )       | (296                     | )      | 6,682 |   |
| Deferred                                                                       |   | (1,244                | )       | (90                      | )      | — |   |
|                                                                           |   | (1,365                | )       | (386                     | )      | 6,682 |   |
| Foreign:                                                                       |   |                  |    |                     |   |   |   |
| Current                                                                        |   | —                |    | —                   |   | — |   |
| Deferred                                                                       |   | —                |    | —                   |   | — |   |
|                                                                           |   | $                     | (11,319 | )                        | $      | (2,417 | ) | $ | 39,521 |   |

 

The effective income tax (expense) benefit varied from the federalstatutory income tax (expense) benefit because of the following differences (inthousands):

 
|                                                                 |   | **Successor Company** |    | **Predecessor Company** |   |
|----------------------------------------------------------------------|--------|-----------------------|---------|-------------------------|--------|
|                                                                 |   | **2002**              |    | **2001**                |   | **2000** |   |
|                                                                 |   |                  |    |                    |   |   |   |
| Income tax  (expense) benefit computed at federal statutory tax rate |   | $                     | (10,208 | )                       | $      | (2,604 | ) | $ | (2,338 | ) |
|                                                                 |   |                  |    |                    |   |   |   |   |   |   |
| Change in tax  (expense) benefit from:                               |   |                  |    |                    |   |   |   |
| Benefit (use) of  previous net operating losses                      |   | —                |    | —                  |   | 8,942 |   |
| Reversal of  excess accruals                                         |   | —                |    | —                  |   | 3,784 |   |
| Minority  interest earnings                                          |   | —                |    | —                  |   | 2,040 |   |
| State income  taxes                                                  |   | (886                  | )       | (255                    | )      | 4,410 |   |
| Valuation  allowance                                                 |   | —                |    | 886                     |   | 26,675 |   |
| Stock redemption                                                     |   | —                |    | —                  |   | (1,390 | ) |
| Business meals  and entertainment                                    |   | (26                   | )       | (35                     | )      | (18 | ) |
| Restructuring  costs                                                 |   | (36                   | )       | (41                     | )      | — |   |
| Penalties and  fines                                                 |   | (32                   | )       | (121                    | )      | — |   |
| Lobbying costs                                                       |   | (72                   | )       | (51                     | )      | — |   |
| Reversals and  other                                                 |   | (59                   | )       | (196                    | )      | (2,584 | ) |
|                                                                 |   | (1,111                | )       | 187                     |   | 41,859 |   |
|                                                                 |   | $                     | (11,319 | )                       | $      | (2,417 | ) | $ | 39,521 |   |

 

The tax effects of the principal temporary differences and carryforwardsthat give rise to the Company’s net deferred tax asset (liability) are asfollows (in thousands):

 
|                                          |   | **Successor Company** |   |
|-----------------------------------------------|--------|-----------------------|--------|
|                                          |   | **2002**              |   | **2001** |   |
|                                          |   |                  |   |   |   |
| Net operating loss  carryforwards             |   | $                     | 529    |   | $ | — |   |
| Reserves for adjustments  and allowances      |   | 6,680                 |   | 12,603 |   |
| Vacation and incentive  compensation accruals |   | 95                    |   | — |   |
| Tax credit  carryforwards                     |   | 685                   |   | — |   |
| Investment in  Kaiser-Hill                    |   | (12,428               | )      | (5,037 | ) |
| Write-down of other  investments              |   | (2,099                | )      | 418 |   |
| Unrealized gain on  marketable securities     |   | —                |   | (2,466 | ) |
| Other                                         |   | —                |   | 267 |   |
|                                          |   | (6,538                | )      | 5,785 |   |
| Valuation allowance                           |   | —                |   | — |   |
|                                          |   | $                     | (6,538 | ) | $ | 5,785 |   |

 

The ability to derivefuture benefit from some of the elements contributing to the net deferred taxliability at December 31, 2002 is dependent on the Company’s ability togenerate sufficient taxable income prior to expiration.  In the fourth quarter of 2002, the companydetermined that in addition to the reduction of tax carryforwards due to the bankruptcyexception of 382, the tax basis of various assets also was required to bereduced.  This created a deferred taxliability that would be due upon disposition of the assets. The Companybelieves that the results of its future operations will be sufficient to assureutilization of the tax benefits prior to expiration.

 

In December 2000, theChapter 11 bankruptcy reorganization of the Company caused a change in controlunder Internal Revenue Code (IRC) Sec. 382. In 2001, the Company determined that the change in control met the stringentguidelines of the bankruptcy exception provided under the Internal RevenueCode.  This resulted in the Company notbeing subject to the carryforward limitations of IRC Sec. 382.  However, the Company was required to reducecertain carryovers that included net

 

F-15

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operating losses andcredits.  The Company offset thereduction of the carryforwards with the valuation allowance previouslyestablished for those carryforwards.

 

The Company’s net operating loss carryforward at December 31, 2002 of$1,511,000 expires in 2021.  TheCompany’s tax credit carryforward at December 31, 2002 of $685,000 does notexpire.

 

13.             Retiree BenefitsPlans

 

PostEmployment Benefit Plan: As of December 31, 2002 the Company is required tocontinue to fulfill the provisions of a previously curtailed plan whichprovides certain medical and dental benefits to a group of retirees. A portionof the benefit is fully insured and a portion is covered by the Company’sself-insurance. In respect to the retirees covered by the self-insured plan,the benefits are funded to an insurance company as participants’ insuranceclaims are reimbursed. The Company is considering changing elements of thisplan coverage.

 

Thebenefit cost for this curtailed plan for the years ended December 31 consistedof the following (in thousands):

 
|                                                                                                             |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                             |   |     |   |     |   |     |   |
| Interest cost                                                                                                    |   | $        | 502    |     | $      | 505      |   | $ | 412 |   |
| Amortization of transition obligation                                                                            |   | —   |   | —   |   | 980      |   |
| Adjustment for fresh-start accounting due to changes  in actuarial assumptions                                   |   | —   |   | —   |   | 4,084    |   |
| Adjustment for fresh-start accounting due to changes  in unrecognized gain and unamortized transition obligation |   | —   |   | —   |   | 726      |   |
| Net benefit charge                                                                                               |   | $        | 502    |     | $      | 505      |   | $ | 6,202 |   |

 

Becausethere are no new participants in this plan, there is no current service cost.The change in the status of the plan as of December 31 was as follows (inthousands):

 
|                                   |   | **Successor Company** |   | **Predecessor  Company** |   |
|----------------------------------------|--------|-----------------------|--------|--------------------------|--------|
|                                   |   | **2002**              |   | **2001**                 |   | **2000** |   |
|                                   |   |                  |   |                     |   |   |   |
| Benefit obligation at January 1,       |   | $                     | 7,473  |                     | $      | 7,982 |   | $ | 3,998 |   |
| Service cost                           |   | —                |   | —                   |   | — |   |
| Interest cost                          |   | 502                   |   | 505                      |   | 412 |   |
| Benefits paid                          |   | (1,249                | )      | (1,014                   | )      | (512 | ) |
| Actuarial (gain) loss                  |   | 1,005                 |   | 979                      |   | 4,084 |   |
| Benefit obligation at December 31,     |   | 7,731                 |   | 8,452                    |   | 7,982 |   |
| Unrecognized net gain (loss).          |   | (538                  | )      | (979                     | )      | — |   |
| Net benefit obligation at December 31, |   | $                     | 7,193  |                     | $      | 7,473 |   | $ | 7,982 |   |

 

The discount rate used in determining the expense was 6.5% for 2002 and2001 and 6.8% for 2000. Pursuant to the terms of the plan obligations, changes inmedical cost trend rates have no financial impact on the actuarial valuation asthe cost of the benefit to the participant has exceeded the Company’scommitment.  At December 31, 2002, thereis a $538,000 unrecognized loss related to changes in actuarialassumptions.  This loss will beamortized over four years.

 

Theunamortized portion of the original transition obligation at December 18, 2000of $6,527,000 and the unrecognized net gain of $5,801,000 were collectivelyrecognized as a net $726,000 charge to the Statement of Operations as a resultof adopting fresh start accounting upon emergence from bankruptcy (See Note 2).Also in connection with the adoption of fresh-start accounting, the Companyrevised certain actuarial assumptions used in determining the Accumulated PlanBenefit Obligation at December 18, 2000, resulting in an increase to the APBOof over $4.0 million. The Company has included this charge in ReorganizationItems in the accompanying Statement of Operations. Previously, transition balanceswere being amortized over 14.5 years.

 

14.            Benefits and Compensation Plans

 

In2001 the Company discontinued the majority of its previously sponsored employeebenefit plans.  The Company doescontinue to sponsor a 401(k) Plan that allowed employees to defer portions oftheir salary, subject to certain limitations. Total expense for this plan forthe years ended December 31, 2002 and 2001 was $290,000 and $387,000,respectively.

 

15.           Other Contingencies

 

Kaiser Holdings hasvarious obligations and liabilities from its continuing operations, includinggeneral overhead expenses in connection with maintaining, operating and windingdown the various entities and net assets comprising Kaiser Holdings.

 

F-16

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16.           Selected Quarterly FinancialInformation  (Unaudited)

 

Forthe year ended December 31, 2002 (Successor):

 
|                                                       |   | **Fourth Quarter** |   | **Third Quarter** |   | **Second Quarter** |   | **First Quarter** |   |
|------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|--------------------|--------|-------------------|--------|
|                                                       |   |               |   |              |   |               |   |              |   |
| Operating Income  (Loss).                                  |   | (24                | )      | (1,735            | )      | (2,641             | )      | (2,628            | )      |
| Income (loss) from continuing operations before income tax |   | 22,784             |   | 4,259             |   | 876                |   | 1,246             |   |
| Income (loss)  from continuing operations                  |   | 13,867             |   | 2,783             |   | 497                |   | 699               |   |
| Income (Loss)  from Discontinued Operations, net of tax    |   | 694                |   | —            |   | (127               | )      | (70               | )      |
| Net income  (loss)                                         |   | 14,561             |   | 2,783             |   | 370                |   | 629               |   |
| Preferred stock  dividends                                 |   | (982               | )      | (1,017            | )      | (1,094             | )      | (1,078            | )      |
| Net Income  (Loss) Applicable to Common Shareholders       |   | 13,579             |   | 1,766             |   | (724               | )      | (449              | )      |
|                                                       |   |               |   |              |   |               |   |              |   |
| Basic and  Diluted Earnings (Loss) Per Common Share:       |   |               |   |              |   |               |   |              |   |
|                                                       |   |               |   |              |   |               |   |              |   |
| Continuing  operations, net of tax                         |   | $                  | 8.11   |              | $      | 1.11               |   | $                 | (0.38  | ) | $ | (0.24 | ) |
|                                                       |   |               |   |              |   |               |   |              |   |
| Discontinued  operations, net of tax                       |   | 0.43               |   | —            |   | (0.08              | )      | (0.04             | )      |
|                                                       |   |               |   |              |   |               |   |              |   |
| Net Earnings  (Loss) Per Common Share.                     |   | $                  | 8.54   |              | $      | 1.11               |   | $                 | (0.46  | ) | $ | (0.28 | ) |

 

Forthe year ended December 31, 2001 (Successor):

 
|                                                       |   | **Fourth Quarter** |   | **Third Quarter** |   | **Second Quarter** |   | **First Quarter** |   |
|------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|--------------------|--------|-------------------|--------|
|                                                       |   |               |   |              |   |               |   |              |   |
| Operating Income  (Loss).                                  |   | (1,949             | )      | (2,240            | )      | (2,864             | )      | (3,739            | )      |
| Income (loss) from continuing operations before income tax |   | 6,080              |   | 1,032             |   | 500                |   | 45                |   |
| Income (loss)  from continuing operations                  |   | 5,478              |   | 231               |   | (495               | )      | 26                |   |
| Loss from  Discontinued Operations, net of tax             |   | (9,779             | )      | (51               | )      | (367               | )      | —            |   |
| Net income  (loss)                                         |   | (4,301             | )      | 180               |   | (862               | )      | 26                |   |
| Preferred stock  dividends                                 |   | (1,102             | )      | (1,102            | )      | (887               | )      | —            |   |
| Net Income  (Loss) Applicable to Common Shareholders       |   | (5,403             | )      | (922              | )      | (1,749             | )      | 26                |   |
|                                                       |   |               |   |              |   |               |   |              |   |
| Basic and  Diluted Earnings (Loss) Per Common Share:       |   |               |   |              |   |               |   |              |   |
|                                                       |   |               |   |              |   |               |   |              |   |
| Continuing  operations, net of tax                         |   | $                  | 3.64   |              | $      | (0.55              | )      | $                 | (1.28  | ) | $ | 0.11 |   |
|                                                       |   |               |   |              |   |               |   |              |   |
| Discontinued  operations, net of tax                       |   | (8.74              | )      | (0.03             | )      | (0.34              | )      | —            |   |
|                                                       |   |               |   |              |   |               |   |              |   |
| Net Earnings  (Loss) Per Common Share                      |   | $                  | (5.10  | )                 | $      | (0.58              | )      | $                 | (1.62  | ) | $ | 0.11 |   |

 

 
| **Year Ended December 31, 2000 (Predecessor)**                        |   | **Fourth  Quarter** |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|-----------------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|
|                                                                  |   |                |   |               |   |                |   |               |   |
| Gross revenue                                                         |   | $                   | — |               | $      | —              |   | $                  | 99,595 |   | $ | 171,790 |   |
| Service revenue                                                       |   | 1,327               |   | 2,121              |   | 30,251              |   | 46,267             |   |
| Operating income (loss)                                               |   | 2,785               |   | (2,506             | )      | (1,809              | )      | 5,524              |   |
| Net income (loss) from continuing operations before discontinued      |   |                |   |               |   |                |   |               |   |
| operations and extraordinary items                                    |   | 42,938              |   | 5,959              |   | (5,831              | )      | (2,669             | )      |
| Income (loss) from discontinued operations                            |   | (2,752              | )      | (10,190            | )      | 1,964               |   | 343                |   |
| Net income (loss) before extraordinary items                          |   | 40,186              |   | (4,231             | )      | (3,867              | )      | (2,326             | )      |
| Net income (loss)                                                     |   | 164,763             |   | (4,266             | )      | (3,867              | )      | (2,326             | )      |
|                                                                  |   |                |   |               |   |                |   |               |   |
| Basic and fully diluted per share amounts for:                        |   |                |   |               |   |                |   |               |   |
| Income (loss) before discontinued operations and  Extraordinary items |   | $                   | 1.84   |               | $      | 0.26                |   | $                  | (0.25  | ) | $ | (0.11 | ) |
| Discontinued operations                                               |   | (0.12               | )      | (0.44              | )      | 0.09                |   | 0.01               |   |
| Income (loss) before extraordinary items                              |   | 1.72                |   | (0.18              | )      | (0.16               | )      | (0.10              | )      |
| Extraordinary item                                                    |   | 5.35                |   | —             |   | —-             |   | —             |   |
| Net income (loss)                                                     |   | $                   | 7.07   |               | $      | (0.18               | )      | $                  | (0.16  | ) | $ | (0.10 | ) |

 

The results of operations include the effects of the followingnon-recurring and unusual items:

 

2002:  In the fourth quarter of2002, income from continuing operations was favorably impacted by the change inestimate related to the Kaiser-Hill contract that increased the estimatedperformance fee by $34.8 million. Income from discontinued operations was favorably affected by thesuccessful resolution of a claim against a former subcontractor and through thecollection of foreign accounts receivable, which had previously been fullyreserved.

 

In the third quarter of 2002, income from continuing operations wasimpacted by the Company’s sale of its 10% interest in ICF Consulting resultingin a gain of $3.4 million, offset by the restructuring of the notes receivableand establishment of a reserve on the new note with ICF Consulting with a lossof $1.3 million, for a net positive impact of $2.1 million.

 

F-17

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2001:  In the fourth quarter of2001, income from continuing operations was favorably impacted by a change inestimate related to the Kaiser Hill contract that increased the estimatedperformance fee by $15.8 million.

 

2000:  Through June 8, 2000, theCompany consolidated its interest in Kaiser-Hill.  As a result of a change composition of the board of managers, theCompany adopted the equity method of accounting for Kaiser-Hill. Effective asof December 18, 2000, the Company adopted fresh-start reporting which resultedin an extraordinary gain of $147.2, less income tax expense of $22.7 million,related to the forgiveness of debt to be recorded in the fourth quarter of2000. The reorganization under the Bankruptcy Code also allowed the Company torecognize a benefit in the current year for the current year operating loss aswell as previously generated net operating loss carryforwards.  The income tax benefit recorded related tothe current and prior year net operating losses had a favorable impact on netincome from continuing operations of $39.5 million in the fourth quarter of2002.  Income from continuing operationswas also favorably impacted in the fourth quarter for adjustments made to fairvalue certain accounts in connection with the adoption of fresh-start reportingpurposes, totaling $15.2 million. Income (loss) from discontinued operations in the third quarter of 2002reflects the sales of the Company’s sale of its engineering and constructiongroups in two separate transactions for a net loss of $7.7 million.

 

17.           Notes ApplicableSolely to the Predecessor Company

 

**SignificantAccounting Policies**

 

*Principles of Consolidation:* The consolidated financial statements includeall majority-owned or controlled subsidiaries. Investments in unconsolidatedaffiliated companies were accounted for using the equity method. Allsignificant intercompany balances and transactions were eliminated.

 

Dueto the sale of the majority of Old Kaiser’s operations and the reporting ofthose operations as discontinued in the accompanying Statement of Operationsfor all periods presented, all remaining components of reported revenue andgross margin are solely attributable the Company’s 50% ownership ofKaiser-Hill. Prior to June 8, 2000, through a designated majorityrepresentation on Kaiser-Hill’s board of managers, the Company had acontrolling interest in Kaiser-Hill and therefore consolidated Kaiser-Hill’sresults of operations with those of its only other remaining business segment,Engineering and Construction.  EffectiveJune 8, 2000, the Company adopted the equity method of accounting forKaiser-Hill coincident with its signing of an agreement whereby the other 50%owner has the right to designate 3 out of the 5 members of Kaiser-Hill’s boardof managers. The Company retains the right to designate 2 out of the 5 membersof the Kaiser-Hill board of managers. Accordingly, the financial informationcontained herein for Kaiser-Hill is reflected on a consolidated basis for allperiods presented through June 8, 2000, and on the equity basis for financialinformation applicable for periods after June 8, 2000.

 

*Fresh-start Reporting andReorganization Items:*Effective December 18, 2000, the Company adopted the fresh start provisions ofAICPA Statement of Position 90-7, Reporting by Entities in Reorganization Underthe Bankruptcy Code (SOP 90-7). As of such date, the Company estimated that thesum of the claims to ultimately be allowed in the bankruptcy proceedings, plusremaining liabilities incurred after June 9, 2000, would exceed thereorganization value of the emerging entity. Additionally, holders of existingvoting equity securities immediately before confirmation would receive lessthan 50 percent of the voting equity securities of the emerged entity thustriggering a change in control. Under these circumstances, SOP 90-7 called fora new reporting entity to be created and assets and liabilities to be recordedat their then current fair values. This accounting treatment is referred to inthese statements as fresh-start reporting. The income statement effect of theadjustments to the previous carrying value of various assets and liabilitieshas been reported in the Statements of Operations as Reorganization Items.Reorganization Items as reported on the accompanying Statements of Operationsconsist of the net charges made during the period with respect to matters involvingthe bankruptcy. For the year ended December 31, 2000, Reorganization Itemsconsisted of the following (in thousands):

 

| Professional fees                                               |   | $       | 4,827  |   |
|-----------------------------------------------------------------|--------|---------|--------|--------|
| Severance & retention amounts                               |   | 2,776   |   |
| Interest earned on excess cash balances                         |   | (976    | )      |
| Adjustment of accounts to fair value for fresh-start  reporting |   | (15,238 | )      |
|                                                            |   | $       | (8,611 | )      |

 

*Revenue Recognition:* Prior to the divestiture of the majority of itsoperations, the Company’s revenue was derived primarily from long-termcontracts of various types. Revenue on time-and-materials contracts wasrecognized based on actual hours delivered times the contracted hourly billingrate, plus the costs incurred for any materials. Revenue on fixed-pricedcontracts was recognized using the percentage-of-completion method and iscomprised of the portion of expected total contract earnings represented byactual costs incurred to date as a percentage of the contract’s total estimatedcosts at completion. Revenue on cost-reimbursable contracts was recognized tothe extent of costs incurred plus a proportionate amount of the

 

F-18

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contractedfee. Certain cost-reimbursable contracts also included provisions for earningperformance-based incentive fees. Such incentive fees were included in revenueat the time the amounts could be reasonably determined. Provisions foranticipated contract losses were recognized at the time they become estimable.

 

*Foreign Currency Translation*:  Results of operations for foreign entities were translated using theaverage exchange rates during the period. Assets and liabilities weretranslated to U.S. dollars using the exchange rate in effect at the balancesheet date. Resulting translation adjustments were reflected net of tax inshareholders’ equity (deficit) as cumulative translation adjustments. Thebalance of the cumulative translation adjustment was realized in connectionwith the 2000 sales of the Engineering and Construction Group.

 

Supplemental cash flow information for the year ended December 31, 2000is as follows:

 
| Cash payments for interest     |   | $     | 90     |   |
|--------------------------------|--------|-------|--------|--------|
| Cash payments for income taxes |   | 2,171 |   |

 

*Capitalized Software DevelopmentCosts:*   Certain costs, including consultingexpenses and internal labor, incurred to develop major software applicationsfor internal Company use were capitalized and amortized over the estimateduseful or economic lives of the software, respectively. Since the Companydivested of the majority of its operations during 2000 and no longer hadutility for the carrying value of the capitalized software assets, thesecapitalized costs were written off in connection with the Company’s adoption offresh start accounting as of December 18, 2000. Amortization expense of  $0.3 million was recognized during 2000.

 

*Goodwill:*  Goodwill represented the excess of cost of acquired businesses over thefair value of the identifiable net tangible and intangible assets acquired.Goodwill was amortized using the straight-line method over the period for whichthe Company estimated it would benefit directly from the acquisitions. Therange of estimated benefit from the Company’s historical acquisitions rangedfrom five to forty years. The Company periodically evaluated these ranges andthe recoverability of goodwill by comparing the estimated future undiscountedoperating cash flows for each underlying acquisition to the respective carryingvalue of goodwill. The Company’s remaining goodwill was written off during 2000as a result of its sale of the remainder of its Engineering and Construction Group.

 

*Income Taxes:*  Deferred tax assets and liabilities represented the tax effects ofdifferences between the financial statement carrying amounts and the tax basescarrying amounts of the Company’s assets and liabilities. These differenceswere calculated based upon the statutory tax rates in effect in the years inwhich the differences were expected to reverse. The effect of subsequentchanges in tax rates on deferred tax balances was recognized in the period inwhich a tax rate change was enacted. The Company evaluated its ability torealize future benefit from all deferred tax assets and established valuationallowances for amounts that may not have been realizable. Unless otherwisenoted, provisions were not made for U.S. income taxes for the undistributedearnings of the Company’s foreign subsidiaries because the Company intended toreinvest such earnings in continuing operations indefinitely.

 

*Concentrations of Credit Risk andMajor Customers:*   The Company maintained cash balancesprimarily in overnight Eurodollar deposits, investment-grade commercial paper,bank certificates of deposit, and U.S. government securities. The Department ofEnergy, through the Kaiser-Hill joint venture, accounted for approximately 100%of Kaiser’s consolidated gross revenue for the years ended December 31, 2000(all other operating results were presented as “Discontinued Operations” on theStatement of Operations.)

 

**RestructuringPlan**

 

**Over the past few years, theCompany implemented various restructuring plans. Restructuring chargesrecognized in 2000 were $1.9 million. The components of the charges includedcosts incurred for involuntary employee severance, facility closure costsassociated with closing of marginally profitable office locations, and costs tocease certain operating activities. Employee severance costs reflected a 25%personnel reduction or approximately 250 employees of the Company’s whollyowned North American operations and lesser percentage reductions ininternational operations. Facility closure and related costs included disposalcosts of equipment, lease restructuring payments, brokers fees and leasetermination costs.**

 

Restructuringinitiatives undertaken of restructuring activity, for periods prior to theCompany’s filing under Chapter 11 of the Bankruptcy Code on June 9, 2000, hasbeen summarized as Restructuring Charges on the Consolidated Statement ofOperations during the year ended December 31, 2000 and consisted of thefollowing:

 

F-19

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|                               |   | **Balance  January 1,** |   | **Provisions** |   | **Uses** |   | **Balance  December 31,** |   |
|------------------------------------|--------|-------------------------|--------|----------------|--------|----------|--------|---------------------------|--------|
|                               |   |                    |   |           |   |     |   |                      |   |
| Facility  downsizing/consolidation |   | $                       | 355    |           | $      | 1,915    |   | $                         | 2,270  |   | $ | — |   |
|                               |   | $                       | 355    |           | $      | 1,915    |   | $                         | 2,270  |   | $ | — |   |

 

**Divestituresand Acquisitions**

 

Divestitures:  Pursuant to a restructuring plan, theCompany divested of several operating units in 2000. The intention to divest ofcertain operating units qualified the related units as discontinued operationsfor financial reporting purposes.

 

•                        The Engineering & Construction Group’s saleof the Infrastructure and Facilities Division: The Bankruptcy Court approvedthe sale of the Infrastructure and Facilities line of business on July 17,2000. On July 28, 2000, Kaiser completed the sale of its Infrastructure andFacilities line of business, which provided engineering services to clientsaround the world in the transit and transportation, facilities management,water/wastewater treatment, and microelectronics and clean technology sectors.In this transaction, substantially all of the assets of this business were soldto Tyco Group S.A.R.L., the Earth Tech unit of Tyco International Ltd., for acash purchase price of $30 million.

•                        The Engineering & Construction Group’s saleof the Metals, Mining and Industry Division: The Bankruptcy Court approved thesale of the Metals, Mining and Industry line of business on August 17, 2000.Effective as of August 18, 2000, the Company completed the sale of its Metals,Mining and Industry line of business, which provided engineering services toclients around the world in the alumina/aluminum, iron and steel, and miningindustry sectors. In this transaction, substantially all of the assets of thisbusiness were sold to Hatch Associates, Inc., a subsidiary of The Hatch Groupof Canada, for a cash purchase price of $7.0 million.

•                        In 2000, the Company recognized a pretax loss for financial reportingpurposes of approximately $(0.7) million. After adjusting this loss for itemsthat are not deductible for federal income tax purposes, such as associatedgoodwill and intangible asset write-offs totaling $19.2 million, thetransactions resulted in income tax expense of approximately $7.0 million,resulting in a total loss after tax for financial reporting purposes ofapproximately $(7.7) million from the collective sales.

 

**The operating results of the Engineering andConstruction Group prior to divestiture have been segregated from thePredecessor Company’s continuing operations and are reported as a separate lineitem on the Statement of Operations for all periods presented.  Details of the net operating results are asfollows:**

 
|                                               |   | **2000** |    |
|----------------------------------------------------|--------|----------|---------|
|                                               |   |     |    |
| Gross Revenue                                      |   | $        | 158,724 |   |
| Subcontracts and materials                         |   | (97,210  | )       |
| Provision for contract losses                      |   | —   |    |
| Equity in net income of  unconsolidated affiliates |   | 1,275    |    |
| Service Revenue                                    |   | 62,789   |    |
| Operating Expenses:                                |   |     |    |
| Direct Labor and fringe                            |   | 40,606   |    |
| General and administrative                         |   | 23,225   |    |
| Depreciation & amortization                    |   | 1,030    |    |
|                                               |   |     |    |
| Operating (Loss)                                   |   | (2,072   | )       |
| Income tax benefit (expense)                       |   | (894     | )       |
| (Loss) from discontinued operations                |   | $        | (2,966  | ) |

 

Thesegment operating results include all activities that had sole direct benefitto the respective segment.

 

Receivables

 

Receivablesas of December 31, 2000 consisted of $3.1 million currently due less anallowance of $1.4 million.

 

DebtHistory

 

**On December 18, 2000, theeffective date of the Company’s Plan, the $125.0 million in outstanding seniorsubordinated notes due 2003 (Old Subordinated Notes), plus accrued interest at13% thereon from January 1 to June 9, 2000, became an Allowed Class 4 Claim inOld Kaiser’s bankruptcy.  The Planprovided that the Indenture for the Old Subordinated Notes was cancelled as ofthe Plan effective date. Therefore, as of December 18, 2000, the OldSubordinated Notes no longer represented a debt obligation of Old Kaiser.**

 

F-20

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Alsoduring 2000, the holders of the Old Subordinated Notes were offered theopportunity to have a right to “put” their New Preferred (expected to bereceived pursuant to their claim and the terms of the Company’s Plan orReorganization) to Kaiser Government Programs, Inc. (the indirect 100% owner ofOld Kaiser’s 50% interest in Kaiser-Hill Company LLC) (“KGP”). This opportunitywas offered in exchange for the surrender of any remaining rights held byholders of the Senior Subordinated Notes as of August 14, 2000 under aguarantee previously issued by KGP. The exchange offer by KGP expired onNovember 15, 2000, and the holders of $124,303,000, or 99.4%, principal amountof the Senior Subordinated Notes accepted the exchange offer.

 

Asof December 31, 2000, outstanding Old Subordinated Notes represented the rightto receive (1) cash, New Preferred and New Common distributable under the Planand (2) to the extent the holder of an Old Subordinated Note accepted the KGPexchange offer, or is a direct or indirect transferee from a holder of OldSubordinated Notes who accepted the KGP exchange offer, the appropriate numberof KGP put rights. The carrying value of unamortized issuance costs andoriginal issue discount of $1.4 million and $1.3 million, respectively, atDecember 18, 2000 were written off as part of the extraordinary gain of $124.5million recognized from the debt forgiveness in bankruptcy.

 

Backgroundto the Debt Restructuring: Given significant uncertainties beginning in 1998relative to the costs of completing four fixed price nitric acid projects thatworsened the Company’s financial condition beginning in 1998 and the inabilityto finitely determine the impact of the losses on the Company’s liquidity andfinancing sources, management immediately pursued options for additionalfinancing sources and flexibility. In addition to seeking a replacement workingcapital facility, the Company’s Board of Directors also began considering andpursuing other strategic alternatives, including, but not limited to, the saleof portions of the Company.   OnDecember 18, 1998, the Company successfully entered into a new revolving creditfacility (the Revolver) which offered cash borrowings and letters of credit upto an aggregate of $60 million. Proceeds totaling $25,000,000 from the Revolverwere used to repay all outstanding amounts from the former revolving creditfacility and the Company wrote off the unamortized balance of the capitalizedcosts related to the debt facility and recognized an extraordinary charge of$1.1 million, net of tax of $0.5 million.

 

Afterobtaining the Revolver, the Company again increased the estimate of the totalnitric acid projects cost overruns it expected to incur by an additional $19million. This unanticipated material adverse change to the Company’s financialcondition triggered a technical event of default pursuant to the Revolver’sterms. On April 9, 1999, the Company completed the sale of its EFM Group andused $36 million of the sale proceeds to extinguish the outstanding Revolvercash borrowings. The remaining applicable terms of the Revolver, essentiallyletter of credit provisions, expired on June 30, 1999 - concurrent with theCompany’s completion of the sale of its Consulting Group. A charge of $0.8million, net of income taxes of $0.5 was recognized for the write off of theunamortized balance of capitalized costs incurred to originally obtain thefacility. Also in connection with the expiration of the Revolver, the Companywas required to use $10.0 million of the asset sale proceeds to collateralizecertain contract performance guarantee letters of credit that had beenoutstanding under the expired facility.

 

OnOctober 9, 1999, the Company used proceeds from completed asset sales torepurchase $14.0 million of its $15.0 million in outstanding Senior Notes for88% of their face value.  The Companyalso paid the accrued interest on the repurchased notes.  After adjusting the amount of the repurchasediscount by the write off of the unamortized issue discount on the notes andthe unamortized balance of capitalized costs incurred to originally issue thenotes, the net gain on the repurchase was $0.2 million after related incometaxes of $0.1 million.

 

Duringthe summer and fall of 1999, the Company developed and obtained approval byshareholders and holders of the Old Subordinated Notes of a debt restructuringplan (detailed elements of the debt restructuring plan are more fully describedin Amendment No. 3 to the Form S-4 Registration Statement filed with theSecurities and Exchange Commission on October 1, 1999).  However, consummation of the approved debtrestructuring plan remained conditioned on the Company’s ability to obtain a newbank revolving credit facility satisfactory to the Company and an unofficialcommittee of holders of the Old Subordinated Notes.  The proposals ultimately received from potential lenders did notprovide the Company with the necessary level of liquidity and containedprovisions that were not compatible with the Company’s short and long-termoperating needs.  Therefore, based onthe inability to obtain an acceptable credit facility and on continuedfinancial underperformance of its Engineering and Construction Group, onDecember 31, 1999, the Company paid the scheduled interest payment on the$126.0 million in remaining notes and announced that it would delayimplementation of the proposed debt restructuring and re-open negotiations withits noteholders and potential lenders regarding modifications to the debtrestructuring plan. On June 9, 2000, the Company voluntarily filed for Chapter11 protection (See Note 1).

 

OriginalTerms of Senior Notes: The 12% Senior Notes (Senior Notes) were due in 2003.Each note unit consisted of $1,000 principal amount of 12% Senior Notes, and 7warrants, each to purchase one share of the Company’s common stock at anexercise price of $2.30 per share. The warrants contained certain anti-dilution provisions and expired on December 31, 1999. On December 31, 1999, 28,000warrants were exercised for proceeds totaling $64,400.

 

F-21

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OriginalTerms of Senior Subordinated Notes:  TheOld Subordinated Notes consisted of units, each consisting of $1,000 principalamount and 4.8 warrants, each to purchase one share of the Company’s commonstock at an exercise price of $5.00 per share. The warrants expired on December31, 1998. The Company’s obligations under the Old Subordinated Notes weresubordinate to its obligations under the Senior Notes and revolving creditfacilities, if any.

 

Interestpayments were due semiannually on the Senior Notes and the Old SubordinatedNotes (collectively, the Notes). Interest accrued at 13% during 1999 and through to June 9, 2000 as theCompany did not achieve and maintain a specified level of earnings. Theindentures governing the Notes contained business and financial covenants,including restrictions on additional indebtedness, dividends, acquisitions andcertain types of investments, and asset sales.

 

BuildingInvestment

 

Withthe intent of significantly restructuring fixed operating leases for theCompany’s corporate headquarters, the Company paid $1.5 million on November 12,1997, for a 4% ownership interest in a limited liability company (the LLC) thatleased the land and owns the buildings leased primarily by the Company for itscorporate headquarters. The Company was committed to make additional annualcapital contributions to the LLC totaling $600,000 during each of the firstthree years and $700,000 during each of the fourth through ninth years of theLLC. The ownership in the LLC was to have increased to 16% in fixed annual 2.4%increments in each of the eleventh through fifteenth years of the agreement.Transaction costs totaling $1.7 million were capitalized and amortized over theestimated 15-year life of the LLC.

 

EffectiveOctober 28, 2000, the Company amended the terms of the building investmentagreement assigning all subleases to the LLC, discontinuing all leased spaceexcept for month-to-month on a significantly reduced portion of space,eliminating future capital contributions and fixing the maximum amount of thepotential future recovery of the investment to $2.8 million at whatever time asthe property is sold or refinanced. Simultaneous with this modification, theremaining carrying value of the unamortized transaction costs associated withthe original investment of $1.3 million were written-off as a ReorganizationItem due to their impairment.

 

**Leases**

 

TheCompany divested of the majority of its lease commitments during the year endedDecember 31, 2000.  Total rent expensefor all operating leases was $11,022,000 for the year ended December 31,2000.  Sublease rental income was$3,296,000 for the year ended December 31, 2000.

 

Benefits and Compensation Plans

 

Historically,the Company sponsored several retirement benefit plans covering substantiallyall employees who met minimum length of service requirements. These plansincluded a defined-contribution retirement plan that provided for contributionsby the Company based on a percentage of covered compensation, and a 401(k) Planthat allowed employees to defer portions of their salary, subject to certainlimitations. Total expense for these plans for the year ended December 31, 2000was $791,000.

 

In2001, the Company discontinued the majority of its previously sponsoredemployee benefit plans. In addition, all previous common stock-based benefitplans were terminated on December 18, 2000 pursuant to the terms of theCompany’s Plan of Reorganization (any common stock previously reserved forissuance upon exercises of any of the following plan benefits has also beencancelled). A summary of the previously active plans is as follows:

 

FixedStock Option Plans: The Stock Incentive Plan (“Incentive Plan”) provided forthe issuance of options to purchase the Company’s old common stock and theissuance of stock appreciation rights or restricted shares of common stock. Alloutstanding options not exercised prior to December 18, 2000 (the “EffectiveDate”) were cancelled.

 

F-22

----

 

 

**KAISER-HILL****COMPANY, LLCAND SUBSIDIARY**

 

Consolidated FinancialStatements

 

December 31, 2002 and2001

 

(With IndependentAuditors’ Report Thereon)

 

F-23

----

 

**IndependentAuditors’ Report**

 

The MembersKaiser-Hill Company, LLC:

 

We have audited the accompanying consolidated balance sheet ofKaiser-Hill Company, LLC (the Company) and Subsidiary as of December 31, 2002,and the related consolidated statements of income, members’ equity, and cashflows for the year then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and supplementaryconsolidating information based on our audit. The 2001 and 2000 consolidatedfinancial statements of Kaiser-Hill Company, LLC, were audited by otherauditors who have ceased operations. Those auditors expressed an unqualifiedopinion on those consolidated financial statements in their report datedJanuary 25, 2002.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, the 2002 consolidated financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Kaiser-Hill Company, LLC and Subsidiary as of December 312002, and the results of their operations and their cash flows for the yearthen ended, in conformity with accounting principles generally accepted in theUnited States of America.

 

 

Denver, ColoradoFebruary 4, 2003

 

F-24

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

 

ConsolidatedBalance Sheets

 

December31, 2002 and 2001

 

(Amountsin thousands of dollars)

 
|                                                                                      |   | **2002** |    | **2001** |    |
|-------------------------------------------------------------------------------------------|--------|----------|---------|----------|---------|
| **Assets**                                                                                |   |     |    |     |    |
|                                                                                      |   |     |    |     |    |
| Current assets:                                                                           |   |     |    |     |    |
| Cash and cash equivalents                                                                 |   | $        | 16,071  |     | 19,448  |   |
| Current portion of unbilled contract receivables                                          |   | 98,458   |    | 114,380  |    |
| Due from employees                                                                        |   | 51       |    | 114      |    |
| Prepaid expenses and other current assets                                                 |   | 450      |    | 2,114    |    |
|                                                                                      |   |     |    |     |    |
| Total current assets                                                                      |   | 115,030  |    | 136,056  |    |
|                                                                                      |   |     |    |     |    |
| Unbilled contract receivables, net of current portion                                     |   | 77,352   |    | 17,099   |    |
| Prepaid expenses, long-term                                                               |   | 1,128    |    | —   |    |
| Deferred financing costs, net of accumulated amortization of $271 and  $183, respectively |   | 254      |    | 342      |    |
|                                                                                      |   |     |    |     |    |
|                                                                                      |   | $        | 193,764 |     | 153,497 |   |
| **Liabilities  and Members’ Equity**                                                 |   |     |    |     |    |
|                                                                                      |   |     |    |     |    |
| Current liabilities:                                                                      |   |     |    |     |    |
| Accounts payable and payables to subcontractors                                           |   | $        | 74,916  |     | 94,708  |   |
| Current portion of employee incentive plan                                                |   | 10,594   |    | 9,300    |    |
| Accrued vacation                                                                          |   | 11,485   |    | 11,581   |    |
| Accrued salaries and employee benefits                                                    |   | 9,724    |    | 8,780    |    |
| Payable to Members                                                                        |   | 867      |    | 1,008    |    |
|                                                                                      |   |     |    |     |    |
| Total current liabilities                                                                 |   | 107,586  |    | 125,377  |    |
|                                                                                      |   |     |    |     |    |
| Employee incentive plan, net of current portion                                           |   | 28,644   |    | 12,800   |    |
|                                                                                      |   |     |    |     |    |
|                                                                                      |   | 136,230  |    | 138,177  |    |
| Contingencies (note 7)                                                                    |   |     |    |     |    |
|                                                                                      |   |     |    |     |    |
| Members’ equity                                                                      |   | 57,534   |    | 15,320   |    |
|                                                                                      |   |     |    |     |    |
|                                                                                      |   | $        | 193,764 |     | 153,497 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-25

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

 

ConsolidatedStatements of Income

 

Yearsended December 31, 2002, 2001, and 2000

 

(Amountsin thousands of dollars)

 
|                                          |   | **2002** |    | **2001** |    | **2000** |    |
|-----------------------------------------------|--------|----------|---------|----------|---------|----------|---------|
| Gross revenue                                 |   | $        | 732,718 |     | 718,788 |     | 673,751 |   |
| Subcontractor costs and direct material costs |   | (367,355 | )       | (417,180 | )       | (417,203 | )       |
|                                          |   |     |    |     |    |     |    |
| Service revenue                               |   | 365,363  |    | 301,608  |    | 256,548  |    |
|                                          |   |     |    |     |    |     |    |
| Direct cost of service and overhead           |   | (291,986 | )       | (271,977 | )       | (236,671 | )       |
|                                          |   |     |    |     |    |     |    |
| Operating income                              |   | 73,377   |    | 29,631   |    | 19,877   |    |
|                                          |   |     |    |     |    |     |    |
| Other income (expense):                       |   |     |    |     |    |     |    |
| Interest income                               |   | 232      |    | 569      |    | 669      |    |
| Interest expense                              |   | (95      | )       | (116     | )       | (110     | )       |
|                                          |   |     |    |     |    |     |    |
| Net income                                    |   | $        | 73,514  |     | 30,084  |     | 20,436  |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-26

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**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

ConsolidatedStatements of Members’ Equity

 

Yearsended December 31, 2002, 2001, and 2000

 

(Amountsin thousands of dollars)

 
|                                    |   | **Kaiser KH  Holdings, Inc.** |   | **CH2M HILL  Constructors,  Inc.** |   | **Total** |   |
|-----------------------------------------|--------|-------------------------------|--------|------------------------------------|--------|-----------|--------|
|                                    |   |                          |   |                               |   |      |   |   |
| Members’ equity, December 31, 1999 |   | $                             | 3,600  |                               | 3,600  |      | 7,200  |   |
|                                    |   |                          |   |                               |   |      |   |
| Net income                              |   | 10,218                        |   | 10,218                             |   | 20,436    |   |
| Distributions                           |   | (13,300                       | )      | (13,300                            | )      | (26,600   | )      |
|                                    |   |                          |   |                               |   |      |   |
| Members’ equity, December 31, 2000 |   | 518                           |   | 518                                |   | 1,036     |   |
|                                    |   |                          |   |                               |   |      |   |
| Net income                              |   | 15,042                        |   | 15,042                             |   | 30,084    |   |
| Distributions                           |   | (7,900                        | )      | (7,900                             | )      | (15,800   | )      |
|                                    |   |                          |   |                               |   |      |   |
| Members’ equity, December 31, 2001 |   | 7,660                         |   | 7,660                              |   | 15,320    |   |
|                                    |   |                          |   |                               |   |      |   |
| Net income                              |   | 36,757                        |   | 36,757                             |   | 73,514    |   |
| Distributions                           |   | (15,650                       | )      | (15,650                            | )      | (31,300   | )      |
|                                    |   |                          |   |                               |   |      |   |
| Members’ equity, December 31, 2002 |   | $                             | 28,767 |                               | 28,767 |      | 57,534 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-27

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

ConsolidatedStatements of Cash Flows

 

Yearsended December 31, 2002, 2001, and 2000

 

(Amountsin thousands of dollars)

 
|                                                                               |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flows from operating activities:                                              |   |     |   |     |   |     |   |
| Net income                                                                         |   | $        | 73,514 |     | 30,084 |     | 20,436 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |     |   |     |   |     |   |
| Amortization                                                                       |   | 88       |   | 88       |   | 88       |   |
| Changes in assets and liabilities:                                                 |   |     |   |     |   |     |   |
| Increase in contract receivables                                                   |   | (44,331  | )      | (6,548   | )      | (17,664  | )      |
| Decrease (increase) in due from employees                                          |   | 63       |   | (92      | )      | (22      | )      |
| Decrease (increase) in prepaids and other current assets                           |   | 1,664    |   | (1,759   | )      | (355     | )      |
| (Increase) in long-term prepaids                                                   |   | (1,128   | )      | —   |   | —   |   |
| (Decrease) increase in accounts payable and payables to  subcontractors            |   | (19,792  | )      | (6,736   | )      | 10,972   |   |
| Increase in employee incentive plan                                                |   | 17,138   |   | 22,100   |   | —   |   |
| Increase (decrease) in other accrued expenses                                      |   | 848      |   | (3,558   | )      | 9,202    |   |
| (Decrease) increase in payable to Members                                          |   | (141     | )      | 492      |   | (216     | )      |
|                                                                               |   |     |   |     |   |     |   |
| Net cash provided by operating activities                                          |   | 27,923   |   | 34,071   |   | 22,441   |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash flows from financing activities:                                              |   |     |   |     |   |     |   |
| Distributions to Members                                                           |   | (31,300  | )      | (15,800  | )      | (26,600  | )      |
| Proceeds from credit facility                                                      |   | 37,700   |   | 29,900   |   | 42,000   |   |
| Payments on credit facility                                                        |   | (37,700  | )      | (35,900  | )      | (36,000  | )      |
|                                                                               |   |     |   |     |   |     |   |
| Net cash used in financing activities                                              |   | (31,300  | )      | (21,800  | )      | (20,600  | )      |
|                                                                               |   |     |   |     |   |     |   |
| Net (decrease) increase in cash and cash equivalents                               |   | (3,377   | )      | 12,271   |   | 1,841    |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash and cash equivalents, beginning of year                                       |   | 19,448   |   | 7,177    |   | 5,336    |   |
|                                                                               |   |     |   |     |   |     |   |
| Cash and cash equivalents, end of year                                             |   | $        | 16,071 |     | 19,448 |     | 7,177  |   |
|                                                                               |   |     |   |     |   |     |   |
| Supplemental cash flow information:                                                |   |     |   |     |   |     |   |
| Cash paid for interest                                                             |   | $        | 7      |     | 28     |     | 22     |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-28

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**KAISERHILL COMPANY, LLCAND SUBSIDIARY**

 

Notes to ConsolidatedFinancial Statements

 

December 31, 2002and 2001

 

**(1)****                     Organization**

 

Kaiser-Hill Company, LLC was formed on October 24, 1994. The principalbusiness of the Company is to procure, execute, deliver, and perform under acontract with the Department of Energy (DOE) to manage the programs and operatethe DOE facilities at Rocky Flats Environmental Technology Site (RFETS) inGolden, Colorado. The mission of the RFETS is directed toward cleanup,deactivation, and preparation for decontamination and disposition of these DOEfacilities.

 

The Company is a limited liability company owned equally by Kaiser KHHoldings, Inc., a wholly owned subsidiary of Kaiser Group Holdings, Inc.(formerly known as Kaiser Group International, Inc.) (Kaiser), and CH2M HILLConstructors, Inc., an indirect wholly owned subsidiary of CH2M HILL Companies,Ltd. (CH2M HILL) (collectively the Members). Net profits and/or losses anddistributions thereof are allocated equally to the Members.

 

At December 31, 2002, the Company employed approximately 1,480 hourlyworkers and approximately 500 salaried workers. Approximately 84% of the hourlyemployees are represented by United Steel Workers of America under a collectivebargaining agreement which expires on January 15, 2007.

 

On January 24, 2000, the Company and the DOE entered into a newcontract effective February 1, 2000. The new contract is in effect under thephysical completion of the Rocky Flats Closure Project including closure,disposal of nuclear material, demolition of facilities, environmentalremediation, waste disposal, infrastructure and general site operations. Underthe new contract, the Company has the opportunity to earn an additional fee ifthe total costs incurred are below the contract target cost or the completionof the site closure is before March 31, 2007. In addition, the Company can losea portion of its fee if the costs exceed an amount equal to $200 million abovethe contract target cost or the site closure is after March 31, 2007. Themodified maximum and minimum fee available to be earned by the Company throughthe date of closure is $463 million and $151 million, respectively.

 

**(2)****                     SignificantAccounting Policies**

 

***(a)******                      Principlesof Consolidation***

 

The consolidated financial statements include the Company and itswholly owned subsidiary Kaiser-Hill Funding Company, LLC. All intercompanyaccounts and transactions have been eliminated in the consolidated financialstatements.

 

***(b)******                      RevenueRecognition***

 

Under the contract (the Contract), revenue is recognized using thepercentage of completion method whereby revenue is accrued in an amount equalto cost plus management’s best estimate of incentive fees. Incentive fees areestimated based on projected total contract costs and site closure date. TheCompany continually monitors its progress towards the completion dates and itsestimated costs at completion and will modify its estimates of fees to beearned as needed. Changes in these estimates could have a significant effect onfuture earnings of the Company. During 2002, management revised its estimate ofprojected cost at completion based upon the Company’s current progress underthe Contract. The change in estimate results in approximately $20,400,000 ofadditional incentive fees to be recognized over the life of the Contract. TheCompany recognized approximately $14,900,000 in additional revenue during theyear ended December 31, 2002 due to the change in estimate.

 

***(c)******                       Statementsof Cash Flows***

 

For purposes of the statements of cash flows, the Company considerscash in checking and short-term investments with original maturities of threemonths or less to be cash and cash equivalents.

 

The Company maintains its cash accounts primarily with banks located inColorado, New York, and Washington D.C. Cash balances are insured by the FDICup to $100,000 per bank and cash equivalents are not

 

F-29

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insured by the FDIC. As of December 31, 2002, the majority of the cashbalance was made up of cash equivalents.

 

***(d)******                      IncomeTaxes***

 

No provision for the payment of income taxes has been made in theaccompanying consolidated financial statements related to the activities of theCompany since the Members each report their share of the Company’s taxableincome in their respective individual income tax return.

 

***(e)******                       Useof Estimates***

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

As discussed in Note 2(b), revenue under the Contract is recognizedusing the percentage of completion method whereby revenue is accrued in anamount equal to cost plus management’s best estimate of incentive fees.Incentive fees are estimated based on projected total contract costs and siteclosure date. Changes in these estimates could have a significant effect on thefuture earnings of the Company.

 

***(f)******                         NewAccounting Pronouncements***

 

In June 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 143, *Accounting for Asset Retirement Obligations*,which establishes accounting standards for recognition and measurement of aliability for an asset retirement obligation and the associated assetretirement cost. This Statement is effective for financial statements issuedfor fiscal years beginning after June 15, 2002. Management does not believe itsadoption will effect the financial statements of the Company.

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*,which addresses financial accounting and reporting for costs associated withexit or disposal activities and nullifies Emerging Issues Task Force (EITF)Issue No. 94-3, *Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity*(includingCertain Costs Incurred in a Restructuring). SFAS No. 146 requires that aliability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred as opposed to when an entity commitment to anexit plan as prescribed under EITF No. 94-3. SFAS No. 146 also establishes thatthe initial liability be measured at fair value. SFAS No. 146 is effective foractivities that are initiated after December 31, 2002 and management does notbelieve its adoption will effect the financial statements of the Company.

 

***(g)******                      Reclassifications***

 

Certain prior year amounts have been reclassified to conform with thecurrent year presentation.

 

**(3)****                     Related PartyTransactions**

 

In 2002 and 2001, the Members were subcontracted by the Company toperform certain tasks under the Contract. The “Payable to Members” in theaccompanying balance sheets as of December 31, 2002 and 2001 consists of$250,000 and $118,000 respectively, to Kaiser and $617,000 and $890,000,respectively, to CH2M HILL for these subcontracted tasks. These payables arenon-interest bearing.

 

In addition, costs incurred related to work performed by CH2M HILL, themajority of which are reimbursable and billed under the Contract, wereapproximately $473,000 in 2002, $851,000 in 2001, and $799,000 in 2000.

 

F-30

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**(4)****                     ContractReceivables**

 

Contract receivables as of December 31, 2002 and 2001 primarilyrepresent unbilled receivables due under the Contract. Unbilled receivablesresult from revenue and estimated fee that have been earned by the Company butnot billed to the DOE as of the end of the period. Unbilled receivables can beinvoiced at contractually defined intervals and milestones. Managementanticipates that the current portion of unbilled receivables will be billed andcollected in less than one year. Current unbilled receivables primarilyrepresent allowable costs, including subcontractor costs, that have not beensubmitted to the DOE for payment. These costs cannot be invoiced to the DOEuntil payment has been made by the Company to the vendor. In addition, underthe terms of the Contract, the Company receives a cash payment of 50% of theincentive fee due on a quarterly basis. The remainder of the incentive fee,based on projected costs at completion and closure date, will be paid by theDOE upon the completion of the contract currently estimated to beDecember 31, 2006. As such, these amounts are classified as noncurrent inthe accompanying consolidated balance sheets. As discussed above, any modificationsor changes in the cost estimates or the site closure date will impact theseoutstanding amounts. The impact could increase or decrease such amountsdepending upon the estimated charges.

 

As of December 31, 2002 and 2001, the Company has $77.4 millionand $17.1 million, respectively, of long-term unbilled receivables thatrepresent incentive fee under the Contract. These can be billed at thecompletion of the Contract, currently estimated to be December 31, 2006.In addition, the Company has current unbilled receivables of $98.5 million and$114.4 million as of December 31, 2002 and 2001, respectively. This iscomprised of $7.1 million and $8.2 million, respectively, of incentive fees and$91.4 million and $106.2 million, respectively, of direct reimbursable costsunder the Contract that have all been billed since year end.

 

The Company’s contract receivables result primarily from its long-termcontract with the DOE. As a consequence, management believes that credit riskis minimal.

 

**(5)****                     EmployeeIncentive Plan**

 

In connection with the closure contract with the DOE, the Companyimplemented an employee incentive plan. There are two components to the plan.The first component represents a cash bonus which is earned and paid annually.The second component represents the issuance of performance units. These unitsare allocated to employees on an annual basis. The value of these unitsultimately depend on the actual cost achieved and the closure date and rangefrom $0 to $1 per unit. Employees remain eligible for these units as long asthey are employed by the Company or left in good standing, as defined. Paymentsmade for performance units will be paid in cash at the end of the Contract.

 

As of December 31, 2002, the Company has issued approximately34,708,750 performance units and the estimated value to be paid is accrued asemployer incentive plan liability. The payments of the unit bonus will takeplace upon closure of the Contract and therefore the associated accrual isclassified as a long-term employee incentive plan liability in the accompanyingconsolidated balance sheets.

 

**(6)****                     Business Loanand Security Agreement**

** **

The Company currently has a Business Loan and Security Agreement (theAgreement) with a bank. The term of the Agreement is through December 31,2005. The Company, Kaiser and CH2M HILL granted a first lien security interestto the bank in all of the ownership and equity interest of the Company. As ofDecember 31, 2002 and 2001, the Company had no amounts outstanding under theAgreement.

 

Under the Agreement, the Company has available temporary financing forthe payment of the Company’s costs incurred under the Contract. This financingis utilized throughout the year for periods of less than one month as, underthe terms of the Contract, the DOE must pay the Company’s invoices within threebusiness days of receipt. The funding level under the Agreement can not exceeda Maximum Borrowing Base calculated on the lesser of eligible billed andunbilled government accounts receivable, as defined, or $35,000,000. Under theterms of the Agreement, interest on the advances is calculated either under arate based upon LIBOR or a rate based upon the higher of the Federal Funds Rateor the Prime Rate.

 

F-31

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In connection with the Agreement, the Company incurred $525,000 in loanorigination fees, which are capitalized as deferred financing costs and arebeing amortized to interest expense over the life of the Agreement.

 

The Agreement also contains various financial covenants, includingtangible net worth, fixed charge ratio, and minimum cash balances requirements,among other restrictions. Management believes the Company was in compliancewith all restrictive covenants throughout the year.

 

**(7)****                     Contingencies**

 

The Company’s reimbursable costs are subject to audit in the ordinarycourse of business by various U.S. Government agencies. Management is notpresently aware of any significant costs, which have been, or may be,disallowed by any of these agencies.

 

**(8)****                     Employee BenefitPlans**

 

In accordance with the Contract, the Company participates in severalmulti-employer benefit plans covering substantially all employees who meetlength of service requirements. These plans include a defined benefit pensionplan and two defined contribution plans, the latter of which provide forCompany matching. The Company contribution amounts for the defined contributionplans were approximately $1,916,000, $1,343,000, and $608,000 for 2002, 2001,and 2000, respectively. No amounts were contributed to the defined pensionbenefit plans during 2002, 2001, and 2000 because current levels of funding didnot require contributions to be made.

 

The Company administers these benefit plans with benefits equivalent tothe RFETS contractor benefit plans maintained by the contractor that precededthe Company at RFETS. Under the Contract, the Company recognizes the cost ofbenefit plans when paid, and such costs are reimbursed by the DOE. Any excesspension plan assets or unfunded pension plan liability which may currentlyexist or is remaining at the end of the DOE contract accrues to or is theresponsibility of the DOE.

 

F-32

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**Report of Independent****Accountants on**

**FinancialStatement Schedule**

 

To Board of Directors andShareholders of Kaiser Group Holdings, Inc.

 

Ouraudits of the consolidated financial statements referred to in our report datedMarch 27, 2003 appearing in this Annual Report on Form 10-K also included anaudit of the financial statement schedule listed in Item 15(a)(2) of this Form10-K.  In our opinion, this financialstatement schedule presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.

 

Pricewaterhouse Coopers LLP

March 27, 2003

 

S-1

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**SCHEDULEII –****VALUATION AND QUALIFYING ACCOUNTS**

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**(in thousands)**

 
| **Column A**                     |   | **Column B**                         |   | **Column C**                                  |   | **Column D** |   | **Column E**   |   | **Column F**                       |   |
|----------------------------------|--------|--------------------------------------|--------|-----------------------------------------------|--------|--------------|--------|----------------|--------|------------------------------------|--------|
| **Description**                  |   | **Balance at  Beginning of  Period** |   | **Additions  Charged to Costs  and Expenses** |   | **Other**    |   | **Deductions** |   | **Balance at  the End of  Period** |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Year Ended  December 31, 2002    |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Deducted from  asset account:    |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Allowance for  doubtful accounts |   | $                                    | — |                                          | $      | —       |   | $              | 548    | (1)                                | $      | — |   | $ | 548 |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Discontinued  operations         |   | 20,105                               |   | —                                        |   | —       |   | (2,852         | )      | $                                  | 17,253 |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
|                             |   | $                                    | 20,105 |                                          | $      | —       |   | $              | 548    |                               | $      | (2,852 | ) | $ | 17,801 |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Year Ended  December 31, 2001    |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Deducted from  asset account:    |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Allowance for  doubtful accounts |   | $                                    | 1,419  |                                          | $      | —       |   | $              | (181   | )                                  | $      | (1,238 | ) | $ | — |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Discontinued  operations         |   | 3,081                                |   | 16,409                                        |   | 615          | (1)    | —         |   | 20,105                             |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
|                             |   | $                                    | 4,500  |                                          | $      | 16,409       |   | $              | 434    |                               | $      | (1,238 | ) | $ | 20,105 |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Year Ended  December 31, 2000    |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Deducted from  asset account:    |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Allowance for  doubtful accounts |   | $                                    | 9,594  |                                          | $      | —       |   | $              | — |                               | $      | (8,175 | ) | $ | 1,419 |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
| Discontinued  operations         |   | 19,953                               |   | —                                        |   | —       |   | (16,872        | )      | $                                  | 3,081  |   |
|                             |   |                                 |   |                                          |   |         |   |           |   |                               |   |
|                             |   | $                                    | 29,547 |                                          | $      | —       |   | $              | — |                               | $      | (25,047 | ) | $ | 4,500 |   |

 

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(1)  Reflects reclassified additions to reserves.

 

S-2

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